Question

Kuwait Dental Clinic has incurred the following overhead costs during the past year.

Month	Number of Dental tests	Overhead costs (Y)	Month	Number of Dental tests	Overhead costs (Y)
January	9,800	173,500	July	13,000	190,200
February	6,000	155,200	August	9,500	171,900
March	6,800	169,100	September	9,500	173,400
April	7,500	170,400	October	8,700	170,800
May	9,200	172,300	November	14,000	195,200
June	10,200	175,900	December	13,500	198,800

Required: Use the high-low method,

1. What is the variable overhead costs per one test?

2. What is the total fixed overhead costs of the Clinic?

3. Predict the level of Clinic’s overhead costs that would be incurred during a month when 17,000 tests are taken.

A-Answer	B-Answer	C-Answer

Answer 1

In high-low method, to calculate  fixed cost and Variable cost, select the highest activity units and its costs and lowest activity units and its costs. So,

Particulars	Month	Number of dental tests	Overhead costs ($)
Highest activity	November	14,000	195,200
Lowest activity	February	6,000	155,200

A.

Variable Cost Per Unit:

= (Highest Activity Cost – Lowest Activity Cost)/(Highest Activity Units – Lowest Activity Units)

Variable overhead costs per one test =

(Highest number of dental test's overhead costs - lowest number of dental test's overhead cost)/(highest number of dental tests - lowest number of dental tests)

=(195,200 - 155,200)/(14,000 - 6,000)

=40,000/8,000

= 5

Variable costs is =$ 5/number of dental tests

B.

Total cost = Fixed cost + (variable cost per dental test × number of dental tests)

Take highest number of dental tests :

195,200 = Fixed cost + ( 5 × 14,000)

195,200 = Fixed cost + 70,000

Fixed cost =(195,200 - 70,000)

Fixed cost = 125,200

Fixed cost is $ 125,200

Fixed costs can be calculated either by using highest or lowest number of dental tests. Both the level of tests will give same fixed costs.

C.

Formula for overhead costs = Fixed cost + (Variable cost per dental test × number of dental tests)

So , overhead costs = 125,200 + (5 × number of dental tests)

For 17,000 dental tests

Overhead costs = 125,200 + (5 × 17,000)

= 125,200 + 85,000

=210,200

Summary:

1. variable overhead costs per one test =$ 5

2. total fixed overhead costs of the Clinic= $125,200

3. Clinic's overhead costs when 17,000 tests are taken =$210,200