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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?
? $1.67 per unit
? $1.83 per unit
? $2.75 per unit
? $3.00 per unitans:
variable overhead cost per unit = (10000-4000) / (3000-1000) = $3 per unit
why is this answer incorrect sir ?
i found the high low method really different in this question while comparing kaplan and BPP books..
I am perplexed need explanation sir…
mark me whre am i wrong..Please check that you have typed out the question correctly, because if you have then there is a typing error in the book in which you found it.
The cost of 4,000 units cannot possibly be less than the cost of 3,000 units – partly because there are more units (and so more variable costs) and partly because the fixed costs will be $500 more.
i have copied this question from bpp kit sir
(it’s 3b.18)
and question is as it is…As I explain in my free lectures on this, you need to look at the difference between the highest and lowest levels of output, which are 4,000 units and 1,000 units.
The difference in the costs at these two levels is 9,500 – 4,000 = $5,500
However part of the increase in the cost is due to the fact that the fixed costs are higher by $500 (because they increase for levels above 3,500) and so only the remaining $5,000 is due to there being more variable costs.
Therefore the variable cost per units is 5,000 / (4,000 – 1,000) = $1.67.
but sir in this one :
An organisation has the following total costs at three activity levels:
Activity level (units) 8,000 12,000 15,000
Total cost $204,000 $250,000 $274,000Variable cost per unit is constant within this activity range and there is a step up of 10% in
the total fixed costs when the activity level exceeds 11,000 unit. find variable cost per unit.Q. sir in this question, we do not calculate the variable cost per unit same way like in previous one why ?
Because the step up is 10% and we don’t know immediately what the change in $’s in the fixed cost is.
So in this one the best is to use a bit of simple algebra.
John you love algebra, don’t you? Amrit you could also try simultaneous equation for all activities above 11000. Is that correct, John?
It is not that I love algebra – it is that the exam requires knowledge of basic algebra 🙂
And using simultaneous equations is using basic algebra 🙂 🙂
John please what about those with Indexes of different levels? How do I go about that?
$12000 30units 121
$15000 45units 132
$22000 50units 149
What will be the equation to summarise all? For fixed and variable elements?You need to restate all of the costs to the same year (using the index numbers as explained in my lectures). Then you use the high low method in the normal way.
As to which year to restate the costs to depends on what the question requires.
You must have an answer in the same book in which you found the question, so ask about whatever it is in the answer that you are not clear about and then I will explain.
I formed the question, but I have seen something similar to it once and I am not quite clear about it
I cannot really add to what I replied before. You need to restate all of the total costs to the same year using the index numbers. (Which year would depend on what the question asked for.)
Then you use the high low method in the normal way.There is no point in making up questions yourself – practicing every question in your Revision Kit will prepare you sufficiently for the exam 🙂
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