ExpertHard2 marksShort Answer
ACCA · Question 06 · B. Data analysis and statistical techniques
A heavy manufacturing plant records total overhead costs of $50,000 when producing 10,000 units, and $70,000 when producing 15,000 units.
Management notes that fixed costs step up by $5,000 when production exceeds 12,000 units.
Using the high-low method, calculate the estimated total overhead cost for producing 14,000 units.
(Enter the numeric value only, without commas or currency symbols)
A heavy manufacturing plant records total overhead costs of $50,000 when producing 10,000 units, and $70,000 when producing 15,000 units.
Management notes that fixed costs step up by $5,000 when production exceeds 12,000 units.
Using the high-low method, calculate the estimated total overhead cost for producing 14,000 units.
(Enter the numeric value only, without commas or currency symbols)
How to approach this question
1. Adjust the high activity cost to remove the step-up so it's comparable to the low activity.
2. Calculate Variable Cost (VC) per unit: Change in Cost / Change in Activity.
3. Calculate base Fixed Cost (FC).
4. Calculate total cost for 14,000 units: (14,000 * VC) + base FC + step-up FC.
Full Answer
1. Adjust high cost: $70,000 - $5,000 step-up = $65,000.
2. Variable cost per unit = ($65,000 - $50,000) / (15,000 - 10,000) = $15,000 / 5,000 = $3 per unit.
3. Base Fixed Cost = $50,000 - (10,000 units * $3) = $20,000.
4. Cost for 14,000 units (which is > 12,000, so includes step-up) = (14,000 * $3) + $20,000 + $5,000 = $42,000 + $25,000 = $67,000.
Common mistakes
Failing to adjust for the step-up before calculating the variable cost per unit, which leads to an incorrect VC of $4/unit.
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