Budget_Analysis

Question 3-38, Mixed Cost, Choosing Cost Drivers, and High-Low and Visual-Fit Methods, on p. 121-122 1. Based on the visual-fit method, the Fixed Maintenance Cost based on Units Produced is approximately $13,000 (shown by the lower end of line). Using one of the points in the graph (indicated by the blue arrow), the Variable Cost per Unit is approximately $2.25 Per Unit computed as ($17,500 - $13,000) / 2,000 units. This can be express by the cost function: Y = $13,000 + $2.25 x No. of Units Produced On the other hand, the Fixed Maintenance Cost based on number of Setups is approximately $5,100 (shown by the lower end of line). Using one of the points in the graph (indicated by the blue arrow), the Variable Cost per Unit is approximately $760 Per Setup computed as ($26,000 - $5,100) / 27.5 Setups. This can be express by the cost function: Y = $5,100 + $760 x No. of Setups The April data is an outlier. Outlier is a nonrepresentative or abnormal observation and thus, should be ignored when analyzing fixed costs. 2. In using high-low method, we should know the exact figures; however, since we are relying on graph, the following answers will be just approximations. Based on the high-low method, the Fixed Maintenance Cost based on Units Produced is approximately $11,500 and the Variable Cost per Unit is approximately $2.50 Per Unit. Please refer to the computation below: Maintenance Cost Units Produced High Level Activity 21,000 3,800 Low Level Activity 14,500 1,200 Difference 6,500 2,600 Variable Cost per Unit = $6,500 / 2,600 units = $2.50 per unit Fixed Maintenance Cost = $21,000 � (3,800 x $2.50) = $11,500 This can be express by the cost function: Y = $11,500 + $2.50 x No. of Units Produced On the other hand, based on the high-low method, the Fixed Maintenance Cost based on Number of Setups is approximately $7,093.75 and the Variable Cost per Unit is approximately $687.50 Per Setup. Please refer to the computation below: Maintenance Cost Units Produced High Level Activity 26,000 27.50 Low Level Activity 15,000 11.50 Difference 11,000 16.00 Variable Cost per Unit = $11,000 / 16 setups = $687.50 per Setup Fixed Maintenance Cost = $26,000 � (27.50 x $687.50) = $7,093.75 This can be express by the cost function: Y = $7,093.75 + $687.50 x No. of Setups 3. Both cost drivers seem plausible. Since this is a Maintenance Department, it is most likely that costs are incurred during the setting up of machine rather than during the production phase, thus, I believe that the Number of Setups is the better cost driver