Question

The controller of Dousmann Industries has collected the following monthly expense data for use in analysing the cost behavior of maintenance cost.

Month Total Maintenance costs Total Machine Hours

January 2,750 3,500

February 3,000 4,000

March 3,600 6,000

April 4,500 7,900

May 3,200 5,000

June 5,000 8,000

A) Determine the fixed and variable cost components using the high low method.

B) Prepare a graph showing the behavior of maintenance costs, and identify the fixed and variable elements. Use 2,000- hour increments and 1,000 cost increments.

Answer 1

Solution (A):

Particulars	Machine Hours	Maintenance cost
High activity level	8,000	$ 5,000
Low activity level	3,500	$ 2,750
Change	4,500	$ 2,250
Variable cost per unit*	$ 6 per unit
Fixed cost element**	$ 54,000

Therefore, the cost formula for maintenance cost is: Y = $1,000 + $ 0.5X

*Variable cost per unit = Change in maintenance cost / Change in machine hours

                                     

                                   = $ 2,250 / 4,500 hours

                                     = $ 0.5 per unit

** Fixed cost element

=Total maintenance cost at High activity level- Variable element

=Total maintenance cost at High activity level- (High activity level units X Variable cost per unit)

=$ 5,000 – (8,000 X $ 0.5)

=$ 5,000 - $ 4000

=$ 1,000

Note: High level activity means highest machine hours and maximum maintenance cost among the given data. In the same way, low level activity means lowest machine hours and minimum maintenance cost among the given data.

Solution (B):