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Hello
Just went through the below question taken from BPP exam kit.
The following cost shows the total overhead costs for given levels of a company’s total output.
Cost Output
$ Units4,000 1,000
7,000 2,000
10,000 3,000
9,500 4,000A step up in fixed costs of $500 occurs at an output level of 3,500 units
What would be the variable overhead cost per unit using the high-low tecnique?a) $1.67 per unit
b) $ 1.83 per unit
c) $ 2.75 per unit
d) $ 3,00 per unitMy answer was C (2,75)
WorkingHIgh 3,000 10,000
Low 1,000 4,000Less Step cost (500)
= 2,000 5,500
5,500/2000= $2.75
… but unfortunately it is wrong…
the correct solution is
$9,500-$4,000-$500=$5000
$5000/(4000-1000) = $1,67My mistake was commented as some confusion between the independent variable, output and the independent variable cost.
My question is: what is the independent variable output and independent variable cost?
Could you please help me to understand?
Thanks
Gabbi
You don’t actually need to use the words dependent and independent variable.
However what it means is that here the cost depends on the output (you would obviously overall expect that a higher output would mean a higher cost). So cost is the dependent variable and output is the independent one.When doing high/low we take the highest and lowest of the independent variable (i.e. in this question, the output).
Hello.
I am still confused about this question..
I am using the Kaplan Complete text and that is not how they compute the variable cost per unit after a step-up in fixed cost..I calculated the V.C per unit before the stepup (10,000 – 4,000) / (3,000 – 1,000) = 3
therefore fixed cost before stepup was (using 1000 units) FC = 4000 – (3*1000) = 1000That will make FC after the stepup = 1000 + 500 = 1500
And using 4000 units, the variable cost per unit is now = (9500 – 1500 ) / 4000 = 2Please explain how the calculation is wrong.. Thanking you in advanced 🙂
Oooooh now I get it! The question is not asking for the “new” V.C per unit.. That is how I interpreted the question.. I thought that the VC per unit also changed after the stepup..
It should assumed that V.C per unit is constant throughout…
Thank you very much!! 😀
I am pleased that you sorted yourself out 🙂
(Incidentally, if you watch our free lectures they are a complete course for F2 and go through everything you need to pass the exam well. Then the only book you need spend time on is the Exam/Revision Kit because practice at exam standard questions is vital)
Can anyone solve this
Where variable cost changes after a certain activity
Units Cost
12000 64000
18500 84000Variable cost per unit decreases by $0.5 when activity level exceed 15000 units.Total cost of 20000 units would be :
Best is to use a bit of algebra. If the fixed cost is F, and the variable cost below 15,000 units is V, then:
64000 = F + 12000V
84000 = F + 18500 (V – 0.5) = F + 18500V – 9250
adding 9250 to both sides gives:
93250 = F + 18500VIf you subtract the first equation from this equation, you get:
29250 = 0 + 6500V
So V = 29250/6500 = 4.50
This is the variable cost for below 15000 units, so for more than 15000 units it is 0.50 lower and is therefore $4 per unit.
We know that for 18500 units the cost is $84,000.
20,000 units is 1,500 units more, and so the cost will be higher by 1,500 x $4 = 6,000Therefore the cost for 20,000 units = 84,000+6,000 = $90,000
Dear Mr.John
In this case, the variable cost is different from each level of activity, so why we can use high low method for all levels. Does it still make sense? And, why the note also not mentioned this point. Thanks in advance!
The variable cost only changes at one level.
The note does not cover it because there are all sorts of little tricks there can be, but the technique is always the same. Little tricks are there to check you understand and that you are not simply learning rules (and knowledge of simple algebra is assumed in all ACCA exams).
There is a similar sort of trick in one or two of the test questions at the end of the chapter (and of course it is mentioned in the lecture – there is no point in using the notes without the lectures because they are simply lecture notes.)
@johnmoffat said:
You don’t actually need to use the words dependent and independent variable.
However what it means is that here the cost depends on the output (you would obviously overall expect that a higher output would mean a higher cost). So cost is the dependent variable and output is the independent one.When doing high/low we take the highest and lowest of the independent variable (i.e. in this question, the output).
Thanks alot for your time, but i still could not clear about high low method and please help me to understand. In the quote, you concluded that when doing this method, taking the lowest and highest of the independent variable (the output). However, when i use another way to solve the question, i found the different answer. Here is my answer:
* First, i canculate the variable cost per unit before the stepup, v = (10000-4000)/(3000-2000) = 3
* From that, i have the fix cost , F = 10000
* From that, i have the fix cost after stepup, F’ = 1000 +500=1500
* And, now i could canculate the variable cost for all level of output
output $
1000 3000 (=1000×3)
2000 6000
3000 9000
4000 8000 (9500-1500)
_________________
10000 26000
So, the variable cost per unit is the average one, v = 26000/10000=2.6
Unfortunately, my result dose not match with any answer. Please, let me know there is problem with my canculation, and also give me more explanation about your above mentioned conclusion about high low method. Thanks very much!But you don’t do it another way – you take the highest and lowest output (not the highest and lowest costs) and we certainly don’t start taking averages!
You really need to watch the free lecture on this where the method is explained in detail – I can’t type out the whole lecture here 🙂
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