Forums › ACCA Forums › ACCA MA Management Accounting Forums › High Low Method
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- October 25, 2017 at 7:08 pm #413204
A business has experienced the following labour costs:
Output (units) 7,000 Cost ($) 86,000
Output (units) 12,000 Cost ($) 141,000
Output (units) 9,000 Cost ($) 102,000Fixed costs increase by $15,000 for output in excess of 10,000 units.
Using the high low method what is the estimated cost of producing 14,000 units ?Ans:
Take the highest and lowest output and associated costs when fixed costs are constant.
High – (units) 9,000 Cost ($) 102,000
Low – (units) 7,000 Cost ($) 86,000
Change – (units) 2,000 Cost ($) 16,000Hence VC = $16,000/2,000 = $8 per unit.
FC = 102,000 – (9,000 × 8) = 30,000 at output under 10,000 units.
So cost of 14,000 units = 30,000 + 15,000 + (14,000 × 8) = 157,000What make me confuse is that shouldn’t Highest units should be 12,000 and costs 141,000? How come the answer take 9,000 units as highest one? Please, please, please tell me what am i missing here. Thank you so much
October 26, 2017 at 7:26 am #413234Fixed costs increase if the output is more than 10,000 units.
When this happens, you take the two that are both below 10,000 units because then the fixed cost will be the same for each so you can calculate the variable cost in the normal way.
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