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

Find the statement of cash flows, 1. A fellow student says to you: "The sta...

1. A fellow student says to you: "The statement of cash flows is the easiest of the basic financial statements to prepare because you know the answer before you start. You compa

Determine how much to stock, Determine how much to stock 1. Employ The...

Determine how much to stock 1. Employ The Economic Order Quantity Model This is an easiest model which helps the manager to find out the optimum quantity of stock to order

How much are your fixed costs, 1.    The following table summarizes the sho...

1.    The following table summarizes the short-run production function for your firm. Your product sells for $5 per unit, labor costs $5 per unit, and the rental price of capital i

Prepare the material cost budget of products of a company, Prepare the Mate...

Prepare the Material Cost Budget of products of a Company For a company along with many products, a periodic budget would be developed given as: Assume a firm has 3 products X

Job order costing, Amazing acrobatics performs acrobatics in stadiums aroun...

Amazing acrobatics performs acrobatics in stadiums around the world. The average show sells about 1,000 tickets at $60 per ticket. Each show requires a team of 45 highly trained sp

debt service fund and special revenue fund, For your assignment, discuss w...

For your assignment, discuss when the government and nonprofit organizations would use each of the following funds: Capital projects fund Debt service fund Special r

calculate the percent interest rate and effective cost, 1. The following t...

1. The following three one-year "discount" loans are available toyou: Loan A: $120,000 at a 7 percent discount rate Loan B: $110,000 at a 6 percent discount rate Loan

Cost classification, #question.discuss the importance of cost classificatio...

#question.discuss the importance of cost classification to a business organisation?

Physical measure and net realizable value, Physical Measure and Net Realiza...

Physical Measure and Net Realizable Value Physical Measure/Unit Joint costs are assigned to the joint products according to the ratio of physical measurement of the outpu

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