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Hello John,
I learned when you have to work with High low method that has stepped fixed cost, you have to choose the high low activity levels that remain unchanged, to get the variable cost and apply to the activity level after changing.
So my variable cost would be the same for all the levels if I just calculate (10000-4000)/(3000-1000)= VC. However the answer would be wrong. COuld you please explain me which situations I should apply the high low method with changes in fixed cost in the way explained above, working first with the two points at the “same side” and after appling for the points that I have the change in cost?Example 1. The following shows the total overhead costs for given levels of a company’s total output.
Cost Output
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?
Answer examiners 1.67Thank you!!!
If there are several levels of output given, then for high/low you always choose the highest and lowest levels of activity (i.e. output).
So here, the high is 4,000 units with cost of $9500
The low is 1,000 units with cost of $4000.The difference in the costs of $5,500 is usually due to the extra variable cost of the extra units. However, since 4,000 is above 3,500 it means that $500 of the extra cost is due to the step-up in fixed costs.
So…..the extra variable cost if 5,500 – 500 = $5,000.
This is the extra variable cost of an extra 4000 – 1000 = 3000 units.
So the variable cost per unit is $5,000 / 3,000 = $1.67.
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