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Hello sir,
I don’t understand the way we calculate variable costs and the fixed cost in this question. Could you please explain more about that?
Thank you
I assume you are meaning in relation to the production overheads?
The only reason that the total cost is different is because of the extra variable overheads due to the extra hours (because the fixed overheads will stay the same).
The difference in total cost is 700,000 – 620,000 = 80,000.
The extra hours are 23,000 – 19,000 = 4,000Therefore the variable costs per hour must be 80,000/4,000 = $20 per hour.
If you then go back to either of the two months, you can calculate the total variable overheads (at $20 per hour) and the remainder of the cost must be the fixed overhead per month.
This is the high low method which was examined in Paper F2. If you are still not clear then it will be worth you time watching the lectures on high low in the Paper F2 section of the website.
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