Example of high - low method of cost estimation, Cost Accounting

Assignment Help:

Example of High - Low Method of Cost Estimation

Based on the performance, such you have been provided along with the given information regarding ABC Ltd for the year ended on date 31 December 2004:

                                   Labour hours                           Service cost (Shs)

Highest activity level      800                                         200,000

Lowest activity level       300                                         150,000

Required

Develop a net cost function based upon the above data utilizing the high-low method as:

Solution

Unit Variable cost = Variable cost/ Output Units

= (Cost at high level activity - cost at low level activity)/ (Units at high activity level - units at low activity level)

Variable Cost Per Unit = (Shs.200,000 - shs.150,000)/(800 hrs - 300 hrs)

=   Shs.50,000/500 hrs

= shs.100/hr

Hence b = 100

To obtain the fixed cost a, substitute 'b' into the straight line equation as givens:

While labour hours (x) = 800, service cost (total cost, y) = shs.200,000

Hence from the Straight Line equation, y = a + b x

                                                     200,000 = a + (100) 800

                                                     200,000 = a + 80,000

                                                      a = 200,000 - 80,000

                                                      a = 120,000

Thus fixed costs = shs.120,000

NB:  Even if we utilized the 2nd set of labour hours and service costs, so we were would now get the similar answer that is:

While labour hours (x) = 300,

Service cost (total cost, y) = Shs.150, 000.

Thus 150,000 = a + 100(300)

                     a =150,000 - 30,000

                        = Shs.120,000

Consequently the cost equation is as:

y = 120,000 + 100x     

This equation can be utilized to estimate the total costs: as like an example, while the activity level is as at 1000  labour hours, after that the total cost would be as:

                       Y= 120,000 + 1000(100)

                          =120,000 + 100,000

                          = Shs.220,000.


Related Discussions:- Example of high - low method of cost estimation

Prepare a statement of cash flows, Bickering Ltd Income Stateme...

Bickering Ltd Income Statement for the year ended 30 June 2012   Sales (credit)                                                                           636,10

Marginal costing, MARGINAL COSTING As per the Chartered Institute of Ma...

MARGINAL COSTING As per the Chartered Institute of Management Accountants, London, the phrase 'Marginal cost' means - 'the amount at every given volume of output through which

Overheadd anarlysis, Following figures are taken from annual budget of ABC ...

Following figures are taken from annual budget of ABC manufacturers for the year 2013: Fixed factory overhead Rs. 4,000,000 Factory overhead absorption rate Rs. 70 per direct labor

British Columbia Lumber has a Raw Lumber Division, British Columbia Lumber ...

British Columbia Lumber has a Raw Lumber Division and a Finished Lumber Division. The  variable costs are: 1.Raw Lumber Division: Rs. 100 per 100 board-feet of raw lumber 2.F

Relationship between cost accounting and business enterprise, Relationship ...

Relationship between Cost Accounting and Business Enterprise Cost accounting, like will be mentioned later to adopts a cost center approach to accounting for costs. A cost cen

Standard cost, Standard Cost It is especially serious that you establi...

Standard Cost It is especially serious that you establish a link between standard budgets and costs. At this point, you require putting in your mind to standard costs one the

Classification, what is the classification of cost & how it is done?

what is the classification of cost & how it is done?

An impact on the breakeven, We've all experienced (or heard about) the chal...

We've all experienced (or heard about) the challenges that the airlines have been facing. Read the Zacks Investment Research article, "Airline Industry Stock Outlook - August 2012"

What is callable preferred stock, What is callable preferred stock? Why do ...

What is callable preferred stock? Why do corporations issue such stock? Given the different features that are associated with stock (callable, cumulative, preferred, etc.), what ty

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd