How do I get budgeted activity level?

YYujin10y ago

Hi, sir. I have a problem with following question, The pharmacy in a busy hospital uses pre-determined rates for absorbing total overheads, based on the budgeted number of prescriptions to be handled. A rate of $7 per prescription has been calculated, and the following overhead expenditures have been estimated at two activity levels. Total overheades $97,000 Number of prescriptions 13,000 ----------------------------------------- Total overheades $109,000 Number of prescriptions 16,000 During a particular period fixed overheads were $45,000. Based on the data above, what was the budgeted level of activity in prescriptions to be handled during the period in question? (a) 13,000 (b) 15,000 (c) 16,000 (d) 33,333 And, I have searched for the answer then it said 15,000 is correct. I also looked at explanation which was- Variable OH + Fixed OH = Total OH OH [Fixed OH per prescription = $7 - $4 = $3] Total Fixed OHs = $45,000 >> Budgeted Activity Level << $45,000/$3 = 15,000 prescriptions But the part I don't understand is where the value of $4 comes from. Sir, would you please explain furthermore with details? Thank you.

John MoffatTutor10y ago#1

You need to use the high-low method to calculate the variance and fixed costs. From the two activity levels given, the variable overheads per prescription are (109,000 - 97,000) / (16,000 - 13,000) = $4. (If you are not sure about high-low, then do watch our lectures - our free lectures are a complete course for Paper F2 covering everything you need to pass the exam well.)

YYujin10y ago#2

Oh! High-Low method!!! I never thought to use that! Anyway thank you very much

John MoffatTutor10y ago#3

You are very welcome :-)

LLakshani4y ago#4

Hi, Can you please explain me why we need to divide 3 from the fixed cost ($45000)

John MoffatTutor4y ago#5

The total fixed cost is $45,000 and the fixed cost per prescription is $3 (as explained in my previous post). Therefore the number of prescriptions must be 45,000/3 = 15,000.