In: Accounting
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)
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.