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High Low Method

Forums › ACCA Forums › ACCA MA Management Accounting Forums › High Low Method

  • This topic has 1 reply, 2 voices, and was last updated 7 years ago by John Moffat.
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  • October 25, 2017 at 7:08 pm #413204
    karenleehaha
    Member
    • Topics: 4
    • Replies: 6
    • ☆

    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   ($)  102,000

    Fixed 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 ($) 16,000

    Hence 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) = 157,000 

    What 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 #413234
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    Fixed 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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