Can someone please provide answers and explanations to all parts of the question
ID: 2501562 • Letter: C
Question
Can someone please provide answers and explanations to all parts of the questions? Thank you for your help!
The High-Low Method
Mixed cost behavior is displayed when activities use a mix of resources that are: (1) acquired in advance and (2) acquired as needed. Sometimes it is easy to identify the variable and fixed components of a mixed cost, as in the scenario in Step 2 for the Landry Security Systems sales representatives. Many times, however, the only information available is the total cost of an activity and a measure of output (the variables Y and X). Since accounting records typically show only the total cost and the associated output of a mixed cost item, it is necessary to separate an activity's total cost into its fixed and variable components.
The high-low method is a widely used quantitative method that separates a mixed cost into its fixed and variable components. The high-low method assumes a linear cost relationship: Y - F + VX. Since the accounting records reveal only X and Y, those values must be used to estimate the component parameters F and V.
Basic geometry tells us that two points determine a line. F, the fixed cost component, is the intercept of the total cost line, and V, the variable cost per unit, is the slope of the line. Given two points, the slope and the intercept can be determined. The high-low method preselects the two points that are used to compute the parameters F and V. The high point is defined as the point with the highest output or driver level. The low point is defined as the point with the lowest output or driver level. Note that the high and low points are determined by the independent variable, not the dependent variable (typically cost). With the two points identified, the slope (variable cost) is estimated first by the following equation:
Once the variable cost is calculated, the fixed cost is then calculated using the following formula and the values associated with either the high or the low point (but only the values from the same point):
Apply the Concepts
Introduction:
McCourt Company had the following 10 months of data on materials handling cost and number of moves within its manufacturing plant:
Required:
Variable rate = $
V = (Y2 - Y1)/(X2 - X1) V = (Cost of High Point - Cost of Low Point)/(High Activity Level - Low Activity Level)Explanation / Answer
Variable rate = (Cost of High Point - Cost of Low Point) / (High Activity Level - Low Activity Level) = 6000 / 500 = $12
Fixed cost = (Total Cost - (Variable rate × Level of activity)) / 10 = (45600 - (12 x 3050)) / 10 = $900
Expected annual fixed cost = 900 x 12 = $10800
Expected annual variable cost = 12 x 4000 = $48000
Total annual materials handling cost = 48000 + 10800 = $58800