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Hi sir
Please look at this question.i know how to do both of them.just a small doubt
1.CA Co manufactures a single product and has drawn up the following flexed budget for the year.
60% 70% 80%
$ $ $
Direct materials 120 000 140 000 160 000
Direct labour 90 000 90 000 120 000
Production overhead 54 000 58 000 62 000
Other overhead 40 000 40 000 40 000
Total cost 304 000 343 000 382 000What would be the total cost in a budget that is flexed at the 77% level of activity.
in this question we only take prod. o/h and do the high low method.
2. Qt co manufactures a single product and aan extract from their flexed budget for production costs is as follow
80% 90%
Direct Mat. 2400 2700
lab 2120 2160
Prod O/H 4060 4080
what wud be the total prod cost allowance in a budget flexed at 83
% level of activity??in this question we take labour and prod o/h and do the high low method to find variabe and fixed costs.
how do we come to know what all things to include when finding the variable cost using high low?Q1: You have mistyped the question – the labour at 70% must be 105,000 (not 90,000).
It is only the production overhead for which you need to use high-low.
However the question asks for the total cost. Materials and labour are easy because they are completely variable. Other overheads is easy because that is fixed.
Production overheads are semi-variable which is why you need to use high-low on themQ2:
You can see immediately that none of the costs are completely fixed.
You can check whether or not they are completely variable easily.
For example, if material is completely variable then at 90% activity the cost would be 90/80 x 2400 = 2700. It works for material and so this is completely variable.However it doesn’t work for labour and it doesn’t work for overheads. So…since they are not fixed and they are not variable they must be semi-variable and so you need to use high-low.
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