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The following observations have been made of total overhead cost.
Output level (units) 5,000 10,000
Total overhead cost ($) 14,000 27,000The variable element of total overhead cost is known to increase by $1 per unit at output levels above 7,000 units.
What is the variable element of total overhead cost at an output level of 5,000 units?
X = Fixed overhead Y=Variable overhead
14.000= X + 5000*Y
27.000= X + 7000*Y + 3000*(Y+1) [ as after 7000 units the variable cost Y increases by 1$ it becomes (1 +Y)
X=14.000 -5000*Y
27.000 = 14.000- 5000*Y +7000*Y + 3000*Y +3000
27.000 = 17.000 + 5000*Y
10.000 = 5000*Y
Y = 2$Hope i helped…Please share more questions so that we can discuss with each other. i think that is very helpful to all of us
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@anna157, you nailed it but just an attempt to put it in hopefully simpler terms. The first port of call is to adjust for the presence of step v.costs if given figures indicate such level has been passed.
note that after the activity level reaches 7000, additional v.cost of $1 p.u become applicable.
from the question ascertain by how many units is this level exceeded (of 7000 units) to the high activity level i.e
=( 10000 – 7000)
= 3000 units therefore total extra v.cost $1*3000 units = $3000
subtract this from the total cost at high activity level ($27000 – $3000) = $24000
now $24000 reflects what the total cost at high level would have been if there hadn’t been the extra variable cost.
NOTE. if this is not isolated, this step v.cost it will be reflected in the 5000 unit activity level (assuming use of the hi lo method), when in reality there are only relevant at 7000 unit activity level and beyond.
using the hi lo method change in total cost becomes $24000 – $14000 = $10000
change in activity (10000 – 5000) = 5000
$10000/$5000 = $2 v.cot per unit. i hope this is helpful.
NOTE again. if the question had asked for the variable element at 10000 unit level you just apply the hi lo method without adjusting for anything as your answer will include both the standard and extra v element@hmanjiche Thnx…You are right but to tell the truth when i answered the the above question i just tried to follow my logic, i had not covered the high- low method topic yet 🙂 my studies aren’t going that fast because of my work unfortunately…Hope to catch up till june.
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