The Controller Of Furgee Industries Has Collected The Follow
The Controller Of Furgee Industries Has Collected The Following Monthl
The controller of Furgee Industries has collected the following monthly expense data for use in analyzing the cost behavior of maintenance costs. The data includes total maintenance costs and total machine hours for various months:
| Month | Total Maintenance Costs | Total Machine Hours |
|---------|---------------------------|---------------------|
| January | $2,000 | 50 |
| February| $3,000 | 75 |
| March | $3,000 | 70 |
| April | $4,000 | 90 |
| May | $3,000 | 65 |
| June | $5,000 | 100 |
Using this data, the task is to determine the variable cost component of maintenance costs per machine hour using the high-low method. The variable cost per machine hour should be rounded to three decimal places.
Paper For Above instruction
The high-low method is a straightforward approach used in cost accounting to estimate the variable and fixed components of a mixed cost, based on the highest and lowest activity levels. This method assumes that the change in total costs between the highest and lowest activity levels is attributable solely to variable costs, with fixed costs remaining constant over the period.
To determine the variable cost per machine hour for Furgee Industries, identify the months with the highest and lowest machine hours, then calculate the change in total costs and machine hours between these two points. These calculations form the basis for deriving the variable cost per unit.
Step 1: Identify the high and low activity levels.
From the data provided:
- Highest machine hours: June (100 hours, $5,000)
- Lowest machine hours: May (65 hours, $3,000)
Step 2: Compute the change in total costs and machine hours.
- Change in total costs: $5,000 (June) - $3,000 (May) = $2,000
- Change in machine hours: 100 hours (June) - 65 hours (May) = 35 hours
Step 3: Calculate the variable cost per machine hour.
Variable cost per machine hour = Change in total costs / Change in machine hours
= $2,000 / 35 hours
≈ $57.143
Thus, the variable cost component per machine hour is approximately $57.143 when rounded to three decimal places.
This estimate implies that for each additional machine hour, maintenance costs increase by about $57.143, assuming linearity and other conditions hold. By understanding this component, management can better forecast costs, budget effectively, and analyze the nature of maintenance expenses relative to operational activity.
It is also beneficial to verify these findings by calculating the fixed cost component, which can be achieved by substituting the variable cost back into the total cost equation at either high or low activity level. For example, at high activity (June):
Total Maintenance Cost = Variable Cost per Machine Hour × Machine Hours + Fixed Cost
$5,000 = ($57.143 × 100) + Fixed Cost
Fixed Cost = $5,000 - $5,714.30
Fixed Cost ≈ -$714.30
A negative fixed cost indicates that the high-low method may oversimplify the cost behavior or that the data points are not perfectly aligned linearly. Nevertheless, the variable cost per machine hour of $57.143 remains a useful estimate for managerial decision-making.
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