Question

The controller of Furgee Industries has collected the following monthly expense data for use in analyzing the cost behavior of maintenance costs. Month Total Maintenance Costs Total Machine Hours January $2,670 330 February 3,170 480 March 3,770 630 April 4,670 560 May 3,370 530 June 5,010 730

The controller of Furgee Industries has collected the following monthly expense data for use in analyzing the cost behavior of maintenance costs.

(a) Your answer is correct. Determine the variable cost components using the high-low method. (Round variable cost to 3 decimal places e.g. 12.250.) Variable cost per machine hour $

The controller of Furgee Industries has collected the following monthly expense data for use in analyzing the cost behavior of maintenance costs.

(b) Your answer is incorrect.  Try again. Determine the fixed components using the high-low method. (Round answer to 0 decimal places e.g. 2,520.) Total fixed costs $

Answer 1

Concepts and reason

The concept used to solve this problem is fixed costs and variable costs.

Fixed Costs: It is the cost which does not change with increase or decrease in the production output level. It remains constant throughout the production. It is a part of total cost to run a business along with variable cost.

Variable Costs: It is a cost which changes with increase or decrease in production output level. It changes with company’s production volume. When production increases, the variable cost also increases and vice-versa

Fundamentals

High-low method: High-low method is one of the methods used to separate variable and fixed component from semi-variable or semi-fixed cost. It can be termed as maximum-minimum method. This method involves use of highest and lowest level of activity and compares total cost at every level. It is possible to find the fixed and variable element by solving the equations.

This method uses only two figures (set). However, the set chosen might not be the typical ones. The set chosen usually does not show the exact picture of whole set of figure. The relation between sales revenue and costs might not show the exact relation due to presence of some uncommon events happening during that phase.

For example, one of the months chosen might consist of some onetime events like bonus paid which is not an indicator of whole year. This will not provide the best of results.

Using high method, variable and fixed cost from semi-variable cost is calculated as follows:

${\rm{Variable cost per unit}} = \frac{{{\rm{Total cos}}{{\rm{t}}_{{\rm{High units}}}} - {\rm{Total cos}}{{\rm{t}}_{{\rm{Low units}}}}}}{\begin{array}{l}\\{\rm{Difference between number of }}\\\\{\rm{ units produced at both levels}}\\\end{array}}$

${\rm{Fixed cost}} = {\rm{Total cost}} - {\rm{Variable cost}}$

Direct materials: These are the materials which are used in the Production process which constitutes an integral portion of the final product, the cost of which is identifiable and traceable directly to it. The cost of direct material can be directly chargeable to the final product as compared to the indirect material.

Direct labor: Workers or employees directly involved in the manufacture of goods and services are called the direct labor. Direct labor can be directly traceable to a specific product or cost center. In other words the cost of the workers which is directly involved in the transformation of the raw material into the finished product is the direct labor.

(a)
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Calculate total variable manufacturing cost per unit as follows:

$\begin{array}{c}\\{\rm{Variable manufacturing cost per unit}} = \frac{{{\rm{Difference in Total cost}}}}{{{\rm{Difference in number of hours}}}}\\\\ = \frac{{{\rm{Total cos}}{{\rm{t}}_{{\rm{June}}}} - {\rm{Total cos}}{{\rm{t}}_{{\rm{January}}}}}}{{{\rm{730 hours}} - {\rm{330 hours}}}}\\\\ = \frac{{\$ 5,010 - \$ 2,670}}{{40{\rm{0 hours}}}}\\\\ = \$ 5.85\\\end{array}$

(b)

Calculate the fixed cost as shown below.

$\begin{array}{c}\\{\rm{June mentainance cost}} = {\rm{Fixed cost}} + {\rm{Variable cost}}\\\\{\rm{\$ 5,010}} = x + \left( {{\rm{No}}{\rm{. of units}} \times {\rm{Variable cost per unit}}} \right)\\\\\$ 5,010 = x + \left( {730 \times \$ 5.85} \right)\\\\\$ 5,010 = x + \$ 4,270.5\\\end{array}$

Reformulate the above equation to find out the value of x which denotes the fixed cost

$\begin{array}{c}\\\$ 5,010 = x + \$ 4,270.5\\\\x = \$ 5,010 - \$ 4,270.5\\\\ = \$ 739.5\\\end{array}$

Ans: Part a

Total variable manufacturing cost per unit is $5.85

Part b

The fixed component is $739.5