Question

Question 3 30 Marks The chief executive officer of Indira Investment Cc has appointed you because he requires certain information considering that you are currently a studying Accounting at UNAM. The CEO has high expectations of you. He has asked you to prepare next year’s budget. You are currently busy analysing the company’s telephone costs of the 9 months of 2017, in order to arrive at a cost function that you can use. The company provided you with the following information: Month Total cost (N$) Total number of minutes January 260.00 762.00 February 430.00 1338.00 March 338.00 956.00 April 310.00 900.00 Page 13 of 14 May 260.00 485.00 June 387.00 1255.00 July 354.00 1110.00 August 208.00 555.00 September 400.00 1269.00 REQUIRED; 3.1 Prepare a cost formula (cost function) by using the high-low-method. (6) 3.2 Using the cost function in (3.1), calculate what the cost would be if 900 minutes were used. (3) 3.3 Prepare a cost formula (cost function) by using the Least Square method (Simple regression analysis). Show all calculations. (12) 3.4 By using your cost function from (3.3), calculate what the expected cost would be if 900 minutes were used. (3) 3.5 Discuss the differences between the High Low Method and the Least Square Method, also explain why there are differences between your actual data for April and your answer in (3.2) and (3.4).

Answer 1

The data provided is:

Month	Total cost	Total no. of minutes
January	260.00	762.00
February	430.00	1,338.00
March	338.00	956.00
April	310.00	900.00
May	260.00	485.00
June	387.00	1,255.00
July	354.00	1,110.00
August	208.00	555.00
September	400.00	1,269.00

3.1: High-low method:

From the above table we can see that February has the highest minutes and May has the lowest minutes.

Month	Total cost	Total no. of minutes
February	430.00	1,338.00
May	260.00	485.00
Difference (y2-y1)	170.00
Difference (x2-x1)		853.00

Thus variable cost per unit = 170/853 = $0.1993 per minute

Variable cost for Feb = 1338 minutes*$0.1993 = 266.66

Thus fixed cost = Total cost - variable cost = 430 - 266.66 = $163.34

The cost function is: y = a+bx where y = total cost, a = fixed costs, b = variable costs per minute and x = total no. of minutes.

Thus cost function is: y = 163.34+0.1993*x

3.2: If 900 minutes are used then cost = 163.34+(0.1993*900)

= $342.71

3.3: Simple regression (least cost):

In using the simple regression the equation will be in the form of y = a+bx where a = intercept and b = slope.

	y	x	x^2	x*y
	260.00	762.00	580,644.00	198,120.00
	430.00	1,338.00	1,790,244.00	575,340.00
	338.00	956.00	913,936.00	323,128.00
	310.00	900.00	810,000.00	279,000.00
	260.00	485.00	235,225.00	126,100.00
	387.00	1,255.00	1,575,025.00	485,685.00
	354.00	1,110.00	1,232,100.00	392,940.00
	208.00	555.00	308,025.00	115,440.00
	400.00	1,269.00	1,610,361.00	507,600.00
Total	2,947.00	8,630.00	9,055,560.00	3,003,353.00

a = (sum of y*sum of x^2) - (sum of x*sum of x*y)/(n*sum of x^2)- (sum of x)^2

b = (n*sum of x*y) - (sum of x)*(sum of y)/(n*sum of x^2) - (sum of x)^2

Using the numbers, a = (2947*9055560) - (8630*3003353)/(9*9055560) - (8630^2) = 109.3242

b = (9*3003353)-(2947*8630)/(9*9055560)-(8630^2) = 0.2275

Thus the equation is: y = 109.3242+0.2275x

3.4: Cost for 900 minutes = 109.3242+(0.2275*900)

= $314.05

3.5: The high-low method is less scientific and hence less reliable and less accurate than the regression method which uses all data points. As such regression method is a more accurate and reliable method. The high low method only considers the highest level of activity and lowest level of activity. On the other hand the regression method uses all the data points to find equations that fit the data. The equation here is the slope formula.

There are differences between the actual data for April and my answers in 3.2 and 3.4 because the answers in 3.2 and 3.4 are estimated numbers based on different methods of estimation, while the provided data is the actual data. More often than not the actual data usually differs from the estimated data.