Asked by Galina Kvitko on Jun 20, 2024
Verified
The following data pertains to activity and utility costs for two recent years: Year 2 Year 1 Activity level in units 12,0008,000 Utilities cost $15,000$12,000\begin{array} { | l | l | l | } \hline & \text { Year 2 } & \text { Year 1 } \\\hline \text { Activity level in units } & 12,000 & 8,000 \\\hline \text { Utilities cost } & \$ 15,000 & \$ 12,000 \\\hline\end{array} Activity level in units Utilities cost Year 2 12,000$15,000 Year 1 8,000$12,000 Using the high-low method, the cost formula for utilities is?
A) $1.25 per unit.
B) $6,000 plus $0.75 per unit.
C) $8,000 plus $0.50 per unit.
D) $1.50 per unit.
High-Low Method
A technique in cost accounting used to estimate fixed and variable costs based on the highest and lowest levels of activity.
Utilities Cost
The expenses incurred for essential services such as electricity, water, and gas used by a business.
Cost Formula
An algorithm or equation used to predict the costs associated with producing a certain number of units.
- Apply the high-low method and scattergraph method in estimating costs.
Verified Answer
GS
Gurpreet SinghJun 23, 2024
Final Answer :
B
Explanation :
The high-low method involves taking the highest and lowest activity levels and their corresponding costs to determine the variable cost per unit and the fixed cost. The variable cost per unit is calculated by dividing the difference in costs by the difference in activity levels. For the given data: Variable cost per unit = ($15,000 - $12,000) / (12,000 units - 8,000 units) = $3,000 / 4,000 units = $0.75 per unit. To find the fixed cost, we use one of the points (e.g., Year 1) and the formula: Total cost = Fixed cost + (Variable cost per unit × Activity level). So, $12,000 = Fixed cost + ($0.75 × 8,000 units). Solving for Fixed cost gives $6,000. Therefore, the cost formula is $6,000 plus $0.75 per unit.
Learning Objectives
- Apply the high-low method and scattergraph method in estimating costs.
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