Mary the Queen College (Pampanga), Inc.

JASA, San Matias, Guagua, Pampanga

College of Accountancy
Subject Code: Module No./Title: 3 – COST
BEHAVIOR and FORECASTING

Subject Description: Cost Accounting and Control Period of Coverage:

Introduction:

Objectives:
1. To explain the meaning of cost behavior and define and describe fixed, variable, mixed and step
costs.
2. To separate mixed costs into their fixed and variable components using the high-low method, the
scattergraph method and the method of least squares.

Content:

Definition of Cost Behavior

Cost behavior is an indicator of how a cost will change in total when there is a change in some
activity. In cost accounting and managerial accounting, three types of cost behavior are usually
discussed:

 Variable costs. The total amount of a variable cost increases in proportion to the increase
in an activity. The total amount of a variable cost will also decrease in proportion to the
decrease in an activity.
 Fixed costs. The total amount of a fixed cost will not change when an activity increases or
decreases.
 Mixed or semi-variable costs. These costs are partially fixed and partially variable.
Understanding how costs behave is important for management's planning and controlling of its
organization's costs, and for cost-volume-profit analyses (including the calculation of a
company's break-even point).

Examples of Cost Behavior

An example of a variable cost is the cost of flour for a bakery that produces artisan breads. The
greater the number of loaves produced, the greater the total cost of the flour used by the bakery.
An example of a fixed cost is the depreciation and insurance on the bakery facility and equipment.
Regardless of the quantity of artisan breads produced in a month, the total amount of depreciation
and insurance cost for the month will remain the same.
An example of a mixed cost or semi-variable cost is the bakery's cost of natural gas. Some of the
monthly gas bill is a flat fee charged by the utility and some of the gas bill is the cost of heating the
building. These two components of the gas bill are fixed since they will not change when the bakery
produces more or less loaves of its bread. However, a third component of the gas bill is the cost of
operating the ovens. This component is a variable cost since it will increase when the ovens must
operate for a longer time in order to produce additional loaves of bread.

Why would the cost behavior change outside of the relevant range of activity?

Cost behavior often changes outside of the relevant range of activity due to a change in the fixed
costs. When volume increases to a certain point, more fixed costs will have to be added. When
volume shrinks significantly, some fixed costs could be eliminated.
Here's an illustration. A company manufactures products in its 100,000 square foot plant. The
company's depreciation on the plant is $1,000,000 per year. The capacity of the plant is 500,000
units of output and its normal output is 400,000 units per year. When the company is manufacturing
between 300,000 and 500,000 units, it needs salaried managers earning $400,000 per year. Below
300,000 units of output, some of the salaried manager positions would be eliminated. Above 500,000
units, the company will need to add plant space and managers.
For this example, the relevant range is between 300,000 units and 500,000 units of output per year.
In that range the total of the two fixed costs is $1,400,000 per year. Below 300,000 units, the fixed
costs will drop to less than $1,400,000 because some salaries will be eliminated and some of the
space might be rented. When the volume exceeds 500,000 units per year, the company will need to
add fixed costs because of the additional space and the additional managers. Perhaps the total fixed
costs will be $2,000,000 for output between 500,000 units and 700,000 units.

What is relevant range?

Definition of Relevant Range

In accounting, the term relevant range usually refers to a normal range of volume or normal amount
of activity in which the total amount of a company's fixed costs will not change as the volume or
amount of activity changes. The term relevant range is included in the definition of fixed costs,
because if a company's volume were to decline to an extremely low level, the company would take
action to decrease its total amount of fixed costs. Similarly, if the company's volume were to increase
dramatically, the company would likely have to increase the total amount of its fixed costs .

Example of Relevant Range

Let's assume that a manufacturer's monthly production volume is consistently between 10,000 to
13,000 units of product requiring between 20,000 to 25,000 machine hours. Within these ranges of
activity, the manufacturing operations run smoothly with the same amount of monthly fixed costs,
which on average are approximately $200,000 per month for the cost of supervisors, rent,
depreciation, and other fixed costs.

However, if the manufacturer's volume were to drop to say 7,000 units of product and/or to 14,000
machine hours, it would likely reduce the number of its supervisors, the space it rents, and some
other fixed costs in order to reduce the $200,000 of monthly fixed costs. If the company's volume
were to increase to 18,000 units of product and/or 30,000 machine hours, the company would likely
have to increase its total fixed costs to pay for additional supervisors, space, and other fixed costs.
Hence, an experienced accountant would say that the company's fixed costs are approximately
$200,000 per month within a relevant range of activity.
What is a fixed expense?

Definition of Fixed Expense

A fixed expense is an expense whose total amount does not change when there is an increase in an
activity such as sales or production. The words within a relevant or reasonable range of activity are
normally added to the definition because at an extremely high volume or low volume, a change will
likely occur.

Examples of Fixed Expenses

Let's assume that a retailer's monthly rent is $2,000. If the rent will remain at $2,000 whether the
monthly sales are $15,000 or $30,000, we will say that the rent is a fixed expense. (Of course, if
sales triple or drop to be 20% of the normal amount, the rent will likely have to change. Nonetheless,
the present rent of $2,000 is considered to be a fixed expense since the extreme conditions
are outside of the relevant range for short-term analyses.)
Other examples of expenses that are likely to be fixed within a reasonable range of retail sales
include:

 The store manager's annual salary

 The depreciation expense for the buildings, fixtures, and equipment
 The fixed contracts for security, maintenance fees, phones, internet service, insurance,
lighting, advertising, etc.
Knowing the amount of a company's fixed expenses assists in understanding how the retailer's net
income will change as volume changes. The total amount of fixed expenses can also be used to
quickly estimate a company's break even point.

Why does the fixed cost per unit change?

Fixed costs such as rent or a supervisor's salary will not change in total within a reasonable range of
volume or activity. For example, the rent might be $2,500 per month and the supervisor's salary
might be $3,500 per month. This total fixed cost of $6,000 per month will be the same whether the
volume is 3,000 units or 4,000 units.
On the other hand, the fixed cost per unit will change as the level of volume or activity changes.
Using the amounts above, the fixed cost per unit is $2 when the volume is 3,000 units ($6,000
divided by 3,000 units). When the volume is 4,000 units, the fixed cost per unit is $1.50 ($6,000
divided by 4,000 units).
What does stepped cost mean?

Stepped cost refers to the behavior of the total cost of an activity at various levels of the activity.
When a stepped cost is plotted on a graph (with the total cost represented by the y-axis and the
quantity of the activity represented by the x-axis) the lines will appear as steps or stairs rising from
left to right.
To illustrate a stepped cost, let's assume that you are developing a website and find that the monthly
cost of hosting the site is based on the number of visits. For 0 to 999 visits per month, the cost is $20
per month. When the visits are in the range of 1,000 to 2,999 the monthly cost jumps to $50. If the
visits are 3,000 to 9,999 the cost will be $200 per month. For monthly visits of 10,000 to 24,999 the
cost is $300, and so on. As the data indicates, the total monthly cost is constant or fixed only for a
given range of activity (number of visits). When the number of visits exceeds the upper limit of a
range, the monthly cost jumps to a higher level and remains fixed until the visits exceed the new
upper limit.

A stepped cost is also referred to as a step cost, a step-variable cost, or a step-fixed cost. The
difference between a step-variable cost and a step-fixed cost has to do with the width of the range of
activity. If the total cost increases with small increases in activity, it may be referred to as a step-
variable cost. If the total cost will change only with large increases in the quantity of activity, the
term step-fixed cost is more likely to be used.
Knowing how costs behave is important for decision making. For example, a manufacturer will want
to know how its costs will increase if a new product line is added (or how costs could decrease if an
existing product line is eliminated).

What is a variable cost?

A variable cost is a constant amount per unit produced or used. Therefore, the total amount of the
variable cost will change proportionately with volume or activity. Generally, a product's direct
materials are a variable cost.
To illustrate, let's assume that a bakery uses one pound of flour at a cost of $0.70 per pound for
every loaf of bread it produces. If no bread is produced the total cost of flour is $0. If one loaf is
produced the total cost of flour is $0.70. When 10 loaves are produced the total cost of flour is $7.00.
At the volume of 30 loaves the cost of flour is $21 (30 loaves X 1 pound X $0.70 per pound).

An expense can also be a variable cost. For instance, if a company pays a 5% sales commission on
every sale, the company's sales commission expense will be a variable cost. When the company has
no sales the total sales commission expense is $0. When sales are $100,000 the sales commission
expense will be $5,000. Sales of $200,000 will mean total sales commission expense of $10,000.
Sales of $400,000 will result in total sales commission expense of $20,000.
What are mixed costs?

Definition of Mixed Costs

In accounting, the term mixed costs refers to costs and expenses that consist of two components:
 A fixed component, the total of which does not change as the volume of activity changes
 A variable component, the total of which changes in proportion to the change in the volume
of activity
A mixed cost is also referred to as a semivariable cost.
A mixed cost is expressed by the algebraic formula y = a + bx, where:
 y is the total cost
 a is the fixed cost per period
 b is the variable rate per unit of activity
 x is the number of units of activity
To visualize the behavior of a mixed cost, it is helpful to graph at least 8 observations. Each
observation's total cost (y) is aligned with the y-axis and is also aligned with the volume amounts
indicated on the x-axis. To compute the best fitting line through the graphed data, you could use a
mathematical tool known as simple linear regression analysis. This will calculate the fixed expenses
(a) and the variable rate (b) based on the historical observations.

Example of Mixed Costs

The annual expense of operating an automobile is a mixed cost. Some of the expenses are fixed
because they do not change in total as the number of annual miles change. These include
insurance, parking fees, and some depreciation. Some of the expenses are variable since the total
amount will increase when more miles are driven and will decrease when fewer miles are driven. The
variable expenses include gas, oil, tires, and some depreciation.
Let's assume that a simple linear regression analysis indicates that the past annual expense of
operating an automobile (y) consisted of the fixed cost (a) of $5,000 per year and the variable rate
(b) was $0.20. When the number of miles driven during a year (x) are 15,000 miles, the expected
total annual expense is the fixed expense $5,000 + the variable expense of $0.20 X 15,000 = $5,000
+ $3,000 = $8,000. If the miles driven are 10,000 miles, the expected total annual expense is the
fixed expense of $5,000 + the variable expense of $0.20 X 10,000 = $5,000 + $2,000 = $7,000.

What are the methods for separating mixed costs into fixed and variable?

Three methods for separating mixed costs into their fixed and variable cost components:
1. Prepare a scattergraph by plotting points onto a graph.
2. High-low method.
3. Regression analysis.

It is wise to prepare the scattergraph even if you use the high-low method or regression analysis.
The benefit of the scattergraph is that it allows you to see if some of the plotted points are simply out
of line. These points are referred to as outliers and will need to be reviewed and possibly adjusted or
eliminated. In other words, you don't want incorrect data to distort your calculations under any of the
three methods.

Let's assume that a company uses only one type of equipment and it wants to know how much of the
monthly electricity bill is a constant amount and how much the electricity bill will increase when its
equipment runs for an additional hour. The scattergraph's vertical or y-axis will indicate the dollars of
total monthly electricity cost. Its horizontal or x-axis will indicate the number of equipment hours. For
each monthly electricity bill, a point will be entered on the graph at the intersection of the dollar
amount of the total electricity bill and the equipment hours occurring between the meter reading
dates shown on the electricity bill. If you plot this information for the most recent 12 months, you may
see some type of pattern, such as a line that rises as the number of equipment hours increase.

If you draw a line through the plotted points and extend the line through the y-axis, the amount where
the line crosses the y-axis is the approximate amount of fixed costs for each month. The slope of the
line indicates the variable cost per equipment hour. The slope or variable rate is the increase in the
total monthly electricity cost divided by the change in the total number of equipment hours.
The high-low calculation is similar but it uses only two of the plotted points: the highest point and the
lowest point.

Regression analysis uses all of the monthly electricity bill amounts along with their related number of
equipment hours in order to calculate the monthly fixed cost of electricity and the variable rate for
each equipment hour. Software can be used for regression analysis and it will also provide statistical
insights.

If a scattergraph of data shows no clear pattern, you should not place much confidence in the
calculated amount of the fixed cost and variable rate regardless of the method used.

What is the high-low method?

The high-low method is a simple technique for computing the variable cost rate and the total amount
of fixed costs that are part of mixed costs. Mixed costs are costs that are partially variable and
partially fixed. The cost of electricity used in a factory is likely to be a mixed cost since some of the
electricity will vary with the number of machine hours, while some of the cost will not vary with
machine hours. Perhaps this second part of the electricity cost is associated with circulating and
chilling the air in the factory and from the public utility billing its large customers with a significant
fixed monthly charge not directly tied to the kilowatt hours of electricity used.
The high-low method uses two sets of numbers: 1) the total dollars of the mixed costs occurring at
the highest volume of activity, and 2) the total dollars of the mixed costs occurring at the lowest
volume of activity. It is assumed that at both points of activity the total amount of fixed costs is the
same. Therefore, the change in the total costs is assumed to be the variable cost rate times the
change in the number of units of activity. Prior to using the high-low method, it is important to plot or
graph all of the data available to be certain that the two sets of numbers being used are indeed
representative.

To illustrate the high-low method, let's assume that a company had total costs of electricity of
$18,000 in the month when its highest activity was 120,000 machine hours. (Be sure to match the
dates of the machine hours to the electric meter reading dates.) During the month of its lowest
activity there were 100,000 machine hours and the total cost of electricity was $16,000. This means
that the total monthly cost of electricity changed by $2,000 when the number of machine hours
changed by 20,000. This indicates that the variable cost rate was $0.10 per machine hour.
Continuing with this example, if the total electricity cost was $18,000 when there were 120,000
machine hours, the variable portion is assumed to have been $12,000 (120,000 machine hours times
$0.10). Since the total electricity cost was $18,000 and the variable cost was calculated to be
$12,000, the fixed cost of electricity for the month must have been the $6,000. If we use the lowest
level of activity, the total cost of $16,000 would include $10,000 of variable cost (100,000 machine
hours times $0.10) with the remainder of $6,000 being the fixed cost for the month.

What happens when the high-low method ends up with a negative amount?

The high-low method of determining the fixed and variable portions of a mixed cost relies on only two
sets of data: 1) the costs at the highest level of activity, and 2) the costs at the lowest level of activity.
If either set of data is flawed, the calculation can result in an unreasonable, negative amount
of fixed cost.
To illustrate the problem, let's assume that the total cost is $1,200 when there are 100 units of
product manufactured, and $6,000 when there are 400 units of product are manufactured. The high-
low method computes the variable cost rate by dividing the change in the total costs by the change in
the number of units of manufactured. In other words, the $4,800 change in total costs is divided by
the change in units of 300 to yield the variable cost rate of $16 per unit of product. Since the fixed
costs are the total costs minus the variable costs, the fixed costs will be calculated to
a negative $400. This unacceptable answer results from total costs of $1,200 at the low point minus
the variable costs of $1,600 (100 units times $16), or total costs of $6,000 at the high point minus the
variable costs of $6,400 (400 units times $16).
The negative amount of fixed costs is not realistic and leads me to believe that either the total costs
at either the high point or at the low point are not representative. This brings to light the importance
of plotting or graphing all of the points of activity and their related costs before using the high-low
method. (The number of units uses the scale on the x-axis and the related total cost at each level of
activity uses the scale on the y-axis.) It is possible that at the highest point of activity the costs
were out of line from the normal relationship—referred to as an outlier. You may decide to use the
second highest level of activity, if the related costs are more representative.

If the $6,000 of cost at the 400 units of activity is an outlier, you might select the next highest activity
of 380 units having total costs of $4,000. Now the variable rate will be the change in total costs of
$2,800 ($4,000 minus $1,200) divided by the change in the units manufactured of 280 (380 minus
100) for a variable rate of $10 per unit of product. Using the variable rate of $10 per unit
manufactured will result in the fixed costs being a positive $200. The positive $200 of fixed costs is
calculated at either 1) the low activity: total costs of $1,200 minus the variable costs of $1,000
(100 units at $10); or at 2) the high activity: total costs of $4,000 minus the variable costs of $3,800
(380 units at $10).
The high-low method enables you to estimate variable and fixed costs based on the highest and
lowest levels of activity during the period. Just follow three steps:

1. Based on a table of total costs and activity levels, determine the high and low activity levels.
 Look at the production level and total costs to identify the high and low activity levels. Xeon
Company’s highest production level occurred in May, when the company produced 1,300
units at a total cost of $126,000. The lowest production level occurred in January, when the
company produced just 800 units costing $93,000.
2. Use the high and low activity levels to compute the variable cost
per unit.
To figure out the variable cost per unit, divide the change in total cost by the change in
Activity: Variable Cost per unit = Total Cost (high activity) – Total Cost (low activity)
Units produced (high activity – Units produced (low activity)

= $126,000 - $93,000 = $33,000 = $66

1,300 – 800 500
3. Figure out the total fixed cost.
To compute the total cost, pick either the high or the low cost information (either one works).
Plug this information, along with the variable cost per unit from the preceding section, into the
total cost formula.
Based on your answer, you can determine that making 1,000 units would mean total variable
costs of $66,000 (1,000 units x $66 per unit). Total fixed costs equal $40,200. Therefore, total
 costs would equal $106,200:
Total cost = (Variable cost per unit x Units produced) + Total fixed cost
Total cost = ($66 x 1,000 units) + $40,200 = $106,200
The high-low method focuses only on two points: the highest and lowest activity levels. When using
this method, don’t get confused by activity levels between these two points, even if their costs are
out of the bounds of the costs of the highest and lowest activity levels.

Scattergraph to Separate Mixed Costs into Variable and Fixed Components

13
Set up a table that shows production level and total cost by time period.

To prepare a scattergraph, you need basic data about the number of units produced and the total
costs per time period. Arrange this data by month, week, or some other time period.
 23
Your graph should have the total cost (which includes fixed and variable costs) on the y–axis and the
number of units produced along the x–axis as shown.

33
On this graph, plot each point from the table.
Plot each data point on your graph. You can do so manually by using graph paper or electronically
by using Excel’s Chart Wizard:

Enter the data from Step 1 into the Excel spreadsheet.

Select only the two columns of data (“Production” and “Total Cost”).

Least Squares Regression - Line of Best Fit

Imagine you have some points, and want to have a line that best fits them like this:

We can place the line "by eye": try to have the line as close as possible to all points, and a similar
number of points above and below the line.

But for better accuracy let's see how to calculate the line using Least Squares [Link] Line

Our aim is to calculate the values m (slope) and b (y-intercept) in the equation of a line :

y = mx + b ; Where:

 y = how far up
 x = how far along
 m = Slope or Gradient (how steep the line is)
 b = the Y Intercept (where the line crosses the Y axis)

Steps: To find the line of best fit for N points:

Step 1: For each (x,y) point calculate x2 and xy

Step 2: Sum all x, y, x2 and xy, which gives us Σx, Σy, Σx2 and Σxy (Σ means "sum up")

Step 3: Calculate Slope m:

m = N Σ(xy) − Σx ΣyN Σ(x2) − (Σx)2

(N is the number of points.)

Step 4: Calculate Intercept b:

b = Σy − m ΣxN

Step 5: Assemble the equation of a line

y = mx + b

Example: Sam found how many hours of sunshine vs how many ice creams were sold at the
shop from Monday to Friday:

"x" "y"
Hours of Ice Creams
Sunshine Sold

2 4

3 5

5 7

7 10

9 15

Let us find the best m (slope) and b (y-intercept) that suits that data

y = mx + b

Step 1: For each (x,y) calculate x2 and xy:

x
x y x2 y

2 4 4 8

3 5 9 15

5 7 25 35

7 10 49 70

9 15 81 135
Step 2: Sum x, y, x2 and xy (gives us Σx, Σy, Σx2 and Σxy):

X y x2 xy

2 4 4 8

3 5 9 15

5 7 25 35

7 10 49 70

9 15 81 135

Σx: 26 Σy: 41 Σx2: 168 Σxy: 263

Also N (number of data values) = 5

Step 3: Calculate Slope m:

m = N Σ(xy) − Σx ΣyN Σ(x2) − (Σx)2

= 5 x 263 − 26 x 415 x 168 − 262
= 1315 − 1066840 − 676
= 249164 = 1.5183...

Step 4: Calculate Intercept b:

b = Σy − m ΣxN
= 41 − 1.5183 x 265

= 0.3049...

Step 5: Assemble the equation of a line:

y = mx + b

y = 1.518x + 0.305

Let's see how it works out:

err
y = 1.518x + 0.305
x y or

2 4 3.34 −0.66
 5 7 7.89 0.89

7 10 10.93 0.93

9 15 13.97 −1.03

Here are the (x, y) points and the line y = 1.518x + 0.305 on a graph:

Nice fit!

Sam hears the weather forecast which says "we expect 8 hours of sun tomorrow", so he uses the
above equation to estimate that he will sell

y = 1.518 x 8 + 0.305 = 12.45 Ice Creams

Sam makes fresh waffle cone mixture for 14 ice creams just in case. Yum.

Evaluation:

True or False:
1. Fixed costs in total will NOT change in the short run, but may change in the long run.

2. Variable costs per unit vary with the level of production or sales volume.
3. Currently, most administrative personnel costs would be classified as fixed costs.

4. Fixed costs depend on the resources used, not the resources acquired.

5. The variable cost per unit of a product should stay the same throughout the relevant range of
production.

6. When 100,000 units are produced the fixed cost is $20 per unit. Therefore, when 500,000 units
are produced fixed costs will remain at $20 per unit.

7. A variable cost increases in total when output increases but the per-unit costs remains.

8. As output increases variable cost per unit will also increase.

9. The relevant range is the range of output within which the assumed cost relationship is valid for
the normal operations of the firm.

10. Managerial judgment is critically important in determining cost behavior.

11. Computing unit fixed costs may result in misleading information.

12. The high-low method is an objective method to separate the cost behavior of a mixed cost.

13. Calculation of the cost line using the high-low method tests the lowest cost period to see if it is an
outlier.

14. Using the high-low method, the calculation of the cost line uses the highest and lowest activity
period.

MULTIPLE CHOICE:

1. Fixed costs are costs that:

a. decrease as the per unit variable cost increases.
b. are constant within the relevant range as the level of output changes.
c. increase as the miscellaneous expenses decrease with the level of output.
d. All of these are correct.

2. Depreciation on equipment is an example of a _____.

a. variable cost
 b. mixed cost
c. fixed cost
d. step cost

3. For an activity base to be useful in cost behavior analysis,

a. the activity should always be stated in dollars.
b. there should be a correlation between changes in the level of activity and changes in
costs.
c. the activity should always be stated in terms of units.
d. the activity level should be constant over a period of time.

4. Variable costs within the relevant range

a. stay constant on a per unit basis as output changes.
b. increase in total as output increases.
c. decrease in total as output decreases.
d. All of these are correct.
5. The _____ is a variable cost for Sam's restaurant business.
a. depreciation on equipment
b. rental cost of the building
c. cost of raw materials
d. salary of the manager

6. An increase in the level of activity will have the following effects on unit costs for variable and fixed
costs:
Unit Variable Cost Unit Fixed Cost
a. Increases Decreases
b. Remains constant Remains constant
c. Decreases Remains constant
d. Remains constant Decreases

7. The increased use of automation and less use of the work force in companies has caused a trend
towards an increase in
a. both variable and fixed costs.
b. fixed costs and a decrease in variable costs.
c. variable costs and a decrease in fixed costs.
d. variable costs and no change in fixed costs.

8. Cost behavior analysis applies to

a. retailers.
b. wholesalers.
 c. manufacturers.
d. all entities.

9. An increase in output leads to a(n):

a. increase in total fixed cost.
b. increase in total variable cost.
c. decrease in sunk cost.
d. decrease in step cost.

10. Which of the following is true when output decreases?

a. Total fixed costs remain the same
b. Semi-mixed costs increase
c. Per-unit step costs decrease
d. All of these are correct.

11.
Jomari Toys, Inc.
Cost of Materials
No. of toys produced Total cost of materials
100,000 $20,000
200,000 40,000
300,000 60,000

The cost behavior of the materials cost is

a. fixed
b. variable
c. committed
d. discretionary

12. Chito Company incurred the following costs for the months of January and February.

Type of Cost January February

Insurance $ 7,000 $ 7,000
Utilities 2,600 4,000
Depreciation 2,000 2,000
Materials 5,000 8,000

Assume that output was 1,000 units in January and 3,500 units in February, utility cost is a mixed
cost, and the fixed cost of utilities was $2,000. What was the variable rate per unit of output for
utilities cost?
a. $0.60
b. $0.40
c. $0.20
d. $0.30

13. Which of the following costs are variable?

Cost 10,000 Units 30,000 Units
1. $100,000 $300,000
2. 40,000 240,000
3. 90,000 90,000
4. 50,000 150,000
a. 1 and 2
b. 1 and 4
c. only 1
d. only 4

14. The method of least squares

a. is a way to find the "best fitting" line through a set of data points.
b. is a statistical way of separating a mixed cost.
c. always produces the same cost formula when used on the same data set.
d. all of these are correct

15. Fran Manufacturing Company collected the following production data for the past month:
Units Produced Total Cost
1,600 $66,000
1,300 57,000
1,500 67,500
1,100 49,500
If the high-low method is used, what is the monthly total cost equation?
a. Total cost = $13,200 + $33/unit
b. Total cost = $16,500 + $30/unit
c. Total cost = $0 + $45/unit
 d. Total cost = $9,900 + $36/unit

16. Gian Company’s high and low level of activity last year was 60,000 units of product produced in
May and 20,000 units produced in November. Machine maintenance costs were $156,000 in
May and $60,000 in November. Using the high-low method, determine an estimate of total
maintenance cost for a month in which production is expected to be 45,000 units.
a. $135,000
b. $144,000
c. $117,000
d. $120,000

17. In applying the high-low method, which months are relevant?

Month Miles Total Cost
January 80,000 $192,000
February 50,000 160,000
March 70,000 188,000
April 90,000 260,000
a. January and February
b. January and April
c. February and April
d. February and March

18. Leon Nursery used high-low data from June and July to determine its variable cost of $12 per
unit. Additional information follows:
Month Units produced Total costs
June 2,000 $32,000
July 1,000 20,000
If Leon’s produces 2,300 units in August, how much is its total cost expected to be?
a. $8,000
b. $39,600
c. $27,600
d. $35,600

19. The high-low method is criticized because it

a. is not a graphical method.
b. is a mathematical method.
c. ignores much of the available data by concentrating on only the extreme points.
d. doesn't provide reasonable estimates.

20. Winter Company's activity for the first three months of 2016 are as follows:
Machine Hours Electrical Cost
January 2,100 $4,800
February 2,600 $5,800
 March 2,900 $6,400
Using the high-low method, how much is the cost per machine hour?
a. $2.00
b. $3.00
c. $2.26
d. $1.78

References: Internet and Textbooks

Next Lesson: Cost Volume Profit Analysis

Prepared by: Maria Corazon S. Checked by: William I. Asenci, CPA Approved by: Lanie M.
Guintu CPA MBA - BSA MBA, Dean, College of Accountancy Galvan, PhD (VPAA)