Question

The controller of Blossom Production has collected the following monthly expense data for analyzing the cost behavior of electricity costs.

		Total Electricity Costs				Total Machine Hours
January			$2,660				230
February			3,050				330
March			3,520				460
April			4,770				690
May			3,190				420
June			4,960				790
July			4,030				650
August			3,870				590
September			5,040				670
October			4,270				610
November			3,260				330
December			6,720				810

What electricity cost does the cost equation estimate for a level of activity of 790 machine hours?

Electricity costs

$

By what amount does this differ from June’s observed cost for 790 machine hours?

Amount differ

$

Answer 1

Answer:

a. What electricity cost does the cost equation estimate for a level of activity of 790 machine hours?

Electricity costs

6,580

b. By what amount does this differ from June’s observed cost for 790 machine hours?

Amount differ

1,620

Calculation:

Here we need to calculate the electricity cost using cost equation estimate for a level of activity of 790 machine hours and difference from June’s observed cost for 790 machine hours.

	Machine Hours	Electricity Costs
January	230	$2,660
February	330	3,050
March	460	3,520
April	690	4,770
May	420	3,190
June	790	4,960
July	650	4,030
August	590	3,870
September	670	5,040
October	610	4,270
November	330	3,260
December	810	6,720

For that we need to first calculate the Variable cost per machine hour using high low method. We need to take the Cost at high level and the cost at low level. Then we need to find the difference. Also we need to take the High level activity and Low level activity, then its difference ase below:

	Machine Hours	Electricity Costs
High	810	6,720
Low	230	2,660
Difference	580	4,060

Then we need to divide the difference of Cost at high level and Cost at low level with the difference of High level activity and Low level activity.

Variable cost per machine hour using high low method = (Cost at high level - Cost at low level) / (High level activity - Low level activity)

= 580 / 4,060

= $9 per machine hour

Then we need to find the Fixed costs. If taking high activity of 800 hours, the electricity cost is 6,720. And then multiply the highest activity Machine Hours with the Variable cost per machine hour.

Variable electricity Costs = 810 x 7 = 5,670

Electricity Costs	6,720
Less: Variable electricity Costs	5,670
Fixed costs	1,050

Then we need to calculate the electricity cost as per the equation for a level of activity of 790 machine hours.

Variable electricity costs per hour (a)	7
Level of activity machine hours (b)	790
Total variable electricity costs (a) x (b)	5,530
Add: Fixed Electricity costs	1,050
Total electricity costs estimated	6,580

Then we need to calculate the difference from June’s observed cost for 790 machine hours. For that we need to take the observed electrcity costs for 790 MHs from the table and then deduct it from the total electricity costs estimated.

Total electricity costs estimated	6,580
Observed electrcity costs for 790 MHs	4,960
Difference in amount	1,620