Question 1

Using the High-Low method, determine the cost formula for maintenance costs based on the following data:
- High Activity: 10,000 machine hours, $55,000 total cost
- Low Activity: 6,000 machine hours, $39,000 total cost

What is the estimated total cost at 8,000 machine hours?

Accepted Answer

1. Calculate Variable Rate = (Cost at High - Cost at Low) / (Activity at High - Activity at Low). 2. Calculate Fixed Cost = Total Cost - (Rate * Activity). 3. Apply formula to new activity level.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Selecting high/low based on cost instead of activity; forgetting to add the fixed cost component in the final step.

Using the High-Low method, determine the cost formula for maintenance costs based on the following data:<br/>- High Activity: 10,000 machine hours, $55,000 total cost<br/>- Low Activity: 6,000 machine hours, $39,000 total cost<br/><br/>What is the estimated total cost at 8,000 machine hours?

How to approach this question

Full Answer

Common mistakes

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