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HI-LOW COST ESTIMATION
Variable cost per unit (V) =
(Cost at highest activity level – Cost at lowest activity level)
(Highest activity level – Lowest activity level)
($380,000-$200,000)
(5,900 units – 2,900 units)
= $60/unit
HI-LOW COST ESTIMATION
Fixed cost (F) =
Total cost at
Highest/lowest activity
– (Variable cost × Highest/Lowest activity level)
= y2 − y1
x2 − x1
Month Units FOH
1 1,520 $36,375
2 1,250 38,000
3 1,750 41,750
4 1,600 42,360
5 2,350 55,080
6 2,100 48,100
7 3,000 59,000
8 2,750 56,800
$68,000
Fixed Cost
= y-intercept
= $18,000
To calculate slop
we will take two
points on line:
(0,18000) and
$18,000 (3500,68000)
Regression Statistics
Multiple R 0.98125306
R Square 0.962857567
Adjusted R Square 0.959143324
Standard Error 12355.37931
Observations 12
ANOVA
df SS MS F Significance F
Regression 1 39573446022 39573446022 259.2338469 1.76719E-08
Residual 10 1526553978 152655397.8
Total 11 41100000000
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 43275.63669 14827.52257 2.918601978 0.015337142 10237.85758 76313.4158 10237.85758 76313.4158
X Variable 1 53.42348434 3.318076215 16.10074057 1.76719E-08 46.03034981 60.81661887 46.03034981 60.81661887
Y = $43,276 + $53.42x
Produces 500 units
Y = $43,276 + $53.42(500)
Y = $43,276 + $26710
Y = $113,262
COST
CATEGORIZATION
COST CATEGORIZATION
• DIRECT COST
• Is a price that can be completely attributed to the
production of specific goods/services
COST CATEGORIZATION
• INDIRECT COST
• Costs that are but not necessarily not directly accountable
to cost object
• Costs that are not directly related to production
• Some may be overhead
• May either be fixed or variable
• EX: Administration Personnel, Security Costs, Rent and
Utilities, General and Administrative expenses (officer’s
salaries, accounting department costs and personnel
department costs)
COST CATEGORIZATION
• PRODUCT COSTS
• Costs used to create a product
• Include direct labor, direct materials, consumable
production supplies & factory overhead
• Can also be considered the cost of the labor required to
deliver a service to a customer, should include all costs
related to a service such as compensation, payroll taxes
and employee benefits
COST CATEGORIZATION
• INCREMENTAL COSTS ( or DIFFERENTIAL COST)
• The increase in total costs resulting from an increase in
production or other activity
• EX:
• If a company’s total costs increases from $320,000 to
$360,000 as the result of increasing its machine hours
from 8,000 to 10,000, the incremental cost of the 2,000
machine hours is $40,000
COST CATEGORIZATION
• OPPORTUNITY COSTS
• The cost of choosing one alternative over another and
missing the benefit offered by the forgone opportunity
• An alternative given up when a decision is made
• EX: You have $100 and you can either buy a laptop or go
to a concert. You chose to go to a concert therefore your
opportunity cost is the laptop.
COST CATEGORIZATION
• SUNK COSTS
• A cost for which an outlay has already been made and it
cannot be changed by present or future decision.
• RELEVANT COSTS
• A cost that only relates to a specific management decision,
and which will change in the future as a result of that
decision. Extremely useful for eliminating irrelevant costs
from a decision
• Ex: ABC is considering purchasing a printing press for its
medieval book division. If ABC buys the press, it will
eliminate 10 scribes who have been copying the books by
hand. The wages of the scribes are relevant costs, since
they will be eliminated in the future if management buys
the printing press.
MAJOR COST
STRUCTURES
MAJOR COST STRUCTURES
• DIRECT/PRIMARY COSTS
• A cost that can be completely attributed to the production
of specific goods or services
• Ex: The materials used to produce an automobile are a
direct cost
• FACTORY OVERHEAD COSTS
• Are a varied collection of production-related costs that
cannot be practically traced directly
• Ex: indirect Materials: nails, rivets, lubricants, small tools
• Indirect labor: lift-truck driver’s wages, supervisors
• Other: Property taxes, Building maintenance, Depreciation,
Rent, Utility
MAJOR COST STRUCTURES
• ADMINISTRATIVE COSTS
• Include all executive, organizational and clerical expenses
that cannot logically be included under either production or
marketing
• Ex: Accounting staff wages & benefits, secretarial, public
relations
• COSTS OF SALES and DISTRIBUTION
• Refers to the direct costs attributable to the production of
the goods/supply of services by an entity. Commonly
known as the COGS
EXAMPLE PROBLEMS
Mikitopia, Inc. produces and sells milk flavored bubble gum.
Over the last 5 months Milktopia had the following
production costs and production volume.
Month Cost Volume (in cases)
March 6,000 12
April 6,659 14
May 8,370 18
June 8,800 19
July 8,050 17
1. Using the high-low method, what is the fixed cost per month for bubble gum
production?
2. The variable cost per case is?
Justine Co. produced 5,500 outdoor chairs for Job Order
No.610. Total material cost was P 51,700. Each chair required
2.2 hours of direct labor at P8.90/hour. A total of P53,845 of
factory overhead was traced to Order 610.