Question

In: Accounting

1) You are the managing partner of an accounting firm in the New Westminster area. You...

1) You are the managing partner of an accounting firm in the New Westminster area. You note over the year there is a relationship between the number of hours billed to clients and the staff salary paid. The following is the data you have accumulated. You plan to use the High-Low method. (6) (Calculations to 3 decimals)

Month

Staff Salaries

Hours Billed

1

$400,000

4,000

2

350,000

3,100

3

435,000

5,000

4

477,000

6,000

5

575,000

8,000

6

529,000

7,000

a. Calculate the variable cost. (1)

b. Calculate the fixed costs (1)

c. Determine the cost function equation (2)

d. What is a better alternative to the high-low method and indicate why. (2)

Solutions

Expert Solution

Calculation of variable cost per unit using high low method:

a)

Variable Cost per hour

=(Cost at highest level of activity - Cost at lowest level of activity) / (Highest activity - lowest activity)

= ($575,000 - $350,000) / (8,000 hours - 3,100 hours)

= $225,000 / 4,900 hours

= 45.918 per hour billed.

b)

Fixed Cost = Total Cost at any level - (Variable Cost per hour * Number of hours at that level)

= $575,000 - (45.918 per hour billed * 8,000 hours)

= $575,000 - $367,344

= $207,656

c)

Cost Function equation:

Let Y be the total cost at any level and X be the number of hours billed.

Total cost will be = fixed cost + variable cost per unit * number of hours billed

Y = $207,656 +  45.918 per hour * X

Y = 207,656 +  45.918X

d)

Regression analysis is better than High - Low Method. This is because under High Low method only 2 levels of activities are considered while in regression analysis all the activity levels are taken into consideration, which results in more accurate findings.


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