Question

X Company uses the high-low method to predict monthly overhead costs. The following were May and September cost and activity results: May September OH Cost $6,709 $11,077 Production 2,300 5,100 If December production is expected to be 4,000 units, what are expected total fixed overhead costs in December (round unit costs to two decimal places]?

Answer 1

Highest no. of units produced= 5100 units

Lowest no. of units produced= 2300

Total cost for the highest no. of units= $11,077

Total cost for the lowest no. of units= $6,709

difference between Highest and lowest cost= 11077-6709=4,368

This difference is mainly because of variable cost that increased with the increase in production.

Difference between highest and lowest units produced= 5100-2300=2800

therefore, for extra 2800 units additonal cost incurred is $4,368

variable cost per unit= 4368/2800=$1.56 per unit.

or using formula, variable cost per unit= (total cost of the highest no.of units- totalcost for the lowest no. of units)/(highest no. of units-lowest no. of units)

now let's determine , fixed cost. for 2300 units

Total cost = $6,709

variable cost= 2300*1.56= $3,588

fixed cost = total cost- variable cost= 6,709-3,588= $3,121

fixed cost should be same for all level of units.

Check,

Total cost for 5100 units= 11,077

variable cost= 5100*1.56= $7,956

fixed cost= 11,077-7,956= $3,121

now let's determine costs for 4,000 units

Fixed cost= $3,121

Variable cost= 4,000*1.56= $6,240

total cost= 3,121+6,240= $9,361