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Cost behaviour – high low method with stepped fixed costs

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA MA – FIA FMA › Cost behaviour – high low method with stepped fixed costs

  • This topic has 1 reply, 2 voices, and was last updated 1 year ago by John Moffat.
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  • July 29, 2023 at 7:30 pm #689112
    Giovanna992
    Participant
    • Topics: 1
    • Replies: 0
    • ☆

    Hello,

    I am struggling to understand one exercise, as I don’t understand why the change in fixed cost gets deducted from the calculation of the variable costs.

    The exercise is as follows:
    The following shows the total overhead costs for given levels of a company’s total output:
    Cost Outputs
    £4,000 1000
    £7,000 2000
    £10,000 3000
    £9,500 4000

    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 using the high-low method?
    The solution on the book is (£9,500 – £4000 – £500) = £5,000
    and then £5000/(4000-1000) = £1.67

    I thought is was (£9,500 – £4,000)/(4000-1000) = £1.83

    I don’t understand why it subtracts the change in fixed costs in the calculations for the variable costs.

    Many thanks for your help

    July 30, 2023 at 7:34 am #689126
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54684
    • ☆☆☆☆☆

    The costs of $4000 and $9500 are the total costs at the two levels and so are the total of the variable costs and the fixed costs.

    Here, the fixed cost is $500 higher when the output is 4,000 and so $500 of the difference in the total cost is because of this, and only the remaining $5,000 is due to the extra variable cost of the extra 3,000 units. So the variable cost per unit is $5,000/3,000 units = $1.67.

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