Question

Q2 The following data were obtained from the accounting information system of Attawfik Corporation:

                       Units           Total Cost                                       

Month         Produced                                       

January              60       SAR1,533.4                    

February            50               1,300                       

March                80               2,000                       

April                  30                  833.5                    

a.   Use the data for February and March and the two - point method to determine a cost function.

b.   Use the high - low method to determine a cost function.

C. How do you think that a cost function may provide poor estimates of future costs?

(1 Mark)

Please I do not want answer from internet

Answer 1

Answer

a) Cost function

Input function = x

Total function = c

in the month of Feb (x,c) = (50,1300)

in the month of march (x,c) = (80,2000)

cost function F(x) = mx+b

then f(x) = cost function

by conducting musing the formula

we get m = (2000-1300) / (80-50)

=700/30 = 23.33

where c = mx+b

by applying value for the month feb

1300 = 23.33(50)+b

1300 = 1166.5+ b

b = 1300-1166.5 = 133.5

Cost function c= 23.33x + 133.50

b) high - low method

- Identify high-low activities from the data

- The variable cost per unit

- Total fixed cost

y = f + vx

Variable cost :-

v = (highest cost - lowest cost) / (highest unit - lowest unit)

v = (2000 - 833.50 ) / (80 - 30)

= 1166.50 / 50 = 23.33

Fixed cost

y = f +vx

833.50 = f + (23.33 * 30 )

f = 833.50 - 699.9

f = 133.6

Cost function y = 133.60 + 23.33x

c)

Cost function provide only eastimates based on the highest and lowest data reading of teo points.

It can lead to poor estimated of future cost where future cost can have high variance as compared to the estimated based on cost function