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cost behaviour

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA MA – FIA FMA › cost behaviour

  • This topic has 5 replies, 2 voices, and was last updated 11 months ago by John Moffat.
Viewing 6 posts - 1 through 6 (of 6 total)
  • Author
    Posts
  • February 15, 2022 at 5:54 pm #648675
    dishamehta1620
    Participant
    • Topics: 4
    • Replies: 6
    • ☆

    The following observations of output and cost have been made:
    Output Cost
    Units $
    8,000 39,400
    20,000 68,000
    It is known that at output levels above 15,000 units, variable cost per unit drops by $1 per unit for all
    subsequent units produced.
    What is the variable cost for each unit of output above 15,000 units?

    Hello professor, how to do this sum?

    February 15, 2022 at 5:56 pm #648676
    dishamehta1620
    Participant
    • Topics: 4
    • Replies: 6
    • ☆

    The following shows the total overhead costs for given levels of a company’s total output.
    Cost Output
    $ Units
    4,000 1,000
    7,000 2,000
    10,000 3,000
    9,500 4,000
    A 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 (to the nearest $0.01) using the high-low technique?

    Also i am quite confused with this sum too.
    please help sir!!

    February 16, 2022 at 9:41 am #648701
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51538
    • ☆☆☆☆☆

    For the second question the difference in cost between the highest and lowest levels of output is $5,500.

    $500 of this is due to the increase in the fixed costs, so only the remaining $5,000 is due to the variable cost.

    So the variable cost per unit is 5,000 / 3,000 = $1.67 per unit

    February 16, 2022 at 9:44 am #648702
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51538
    • ☆☆☆☆☆

    For the first question, if the variable cost per unit for 8,000 units was the same as for 20,000 units, then the total cost for 8,000 units would be 39,400 – (8,000 x $1) = $31,400.

    Using the normal high low approach on costs of 31,400 and 68,000 will then give you the variable cost per unit at the higher level.

    February 17, 2022 at 1:23 pm #648795
    dishamehta1620
    Participant
    • Topics: 4
    • Replies: 6
    • ☆

    sir in the second question there’s a step up in fixed COST so sir, why do we subtract it from output? very confused sir in the high low method.

    February 17, 2022 at 2:31 pm #648807
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51538
    • ☆☆☆☆☆

    I did not subtract it from output!!

    The total cost at each level of output is the total of the variable cost and the fixed cost.

    If there was no step-up in the fixed cost then the difference in the two costs would be just the total variable cost of the extra units.

    Since there is a step-up of $500 then this is the reason for $500 of the difference in the two costs so only the rest of the difference is the total variable cost of the extra units.

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