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Model answer question 4. a)
Variable cost per unit
Material cost = $2,400,000/200,000 = $12 per unit.
Labour cost = $1,200,000/200,000 = $6 per unit.
Variable overhead cost using high-low method: ($1,850,000 – $1,400,000)/(350,000 – 200,000) = $3 per unit.
Therefore total variable cost per unit = $21.
Fixed costs = $1,400,000 – (200,000 x $3) = $800,000Shouldn’t be Fixed costs =1,850,000-(350,000*3)=1,150,000??? Why it was chossen the low units + low costs than high as we already know from various lectures?
I would appreciate any reply please.
thanksThere is certainly no mistake in the answer.
When looking at the overheads, the variable overhead is $3 per unit.
Therefore the fixed overhead can be calculated either from the lowest (in which case 1,400,000 – (200,000 x 3) = 800,000; or from the highest (in which case 18,500,000 – (350,000 x 3) = 800,000).It is only the overheads that are semi-variable, and to bring other costs into the calculation of the fixed and variable elements makes no sense. The other costs are all variable and we know already what they are.
Thanks for the reply Mr. Moffat. I didn’t know that you could calculate fixed overhead costs by taking the lowest. I assume that any person that chose to solve by taking the highest resulting to different results could be also be valid correct?
Best Regards
But whether you take the highest or the lowest gives the same answer (I have done it on both in my last reply, and fixed costs are 800,000 in both cases), and always will – nothing else is “validly correct” !!!
Where you were going wrong is trying to use high low on the total of all of the costs. We only use it on semi-variable costs – not on labour and materials, which are both simply variable costs.
Mr. Moffat I am really sorry wasting your time and my time…apparently I made a mistake in my initial calculations and didn’t realise that calculating the variable cost with the high units can give you exactly the same result as with the low!!!
I hope i will be more careful for tomorrow exams!!!!!Should you wish, you could close and delete the subject. From my end everything is clear now.
Best Regards
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