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

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.

Posted Date: 2/5/2013 4:03:32 AM | Location : United States







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