Question

In: Accounting

The managerial accountant at Sunny Manufacturing needs to determine how many costs are fixed costs and

The managerial accountant at Sunny Manufacturing needs to determine how many costs are fixed costs and how many costs are variable costs in the organization. The managerial accountant reported the following information:

Use the high-low method to determine the cost equation and use machine hours as the base for a cost driver in the analysis.

Month	Machine-Hours	Total Cost
January	1,800	$21,500
February	2,900	$23,200
March	1,000	$19,750
April	2,400	$21,000
May	3,400	$23,900

Expert Solution

Machine hours (Activity level)	total cost
High activity level -May	3,400	$23,900
Low activity level	1,000	$19,750
Change in cost & activity level	2,400	$4,150

Variable cost = Change in cost ÷ Change in activity

= ($23,900 - $19,750) ÷ (3,400 machine-hours - 2,400 machine-hours)

= $4,150 $\div$ 2,400

= $1.73 per machine hour

Hence, fixed cost at activity level of 3,400 machine hours -may month

Fixed cost = Total cost - variable cost

= $23,900 - 3,400 x $1.73

= 23,900 -5,882 = $18,018

Cost equation:

Total cost (Y) = Fixed cost + Variable cost per unit x machine hours

Y = $18,018 + $1.73 * X

Where, X = number of machine hours

Total cost (Y) = Fixed cost + Variable cost per unit x machine hours

Y = $18,018 + $1.73 * X

Ramesh R answered 3 years ago

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