The Managerial Accountant At Sunny Manufacturing Needs To De
The managerial accountant at Sunny Manufacturing needs to determine how many costs are fixed costs and how many costs are variable costs in the organization
Sunny Manufacturing's managerial accountant has gathered data on costs and machine hours over several months to analyze cost behavior. The goal is to distinguish between fixed and variable costs using the high-low method, with machine hours serving as the cost driver. Specifically, the data for January through May comprises monthly machine hours and total costs, which can be leveraged to establish a cost equation that accurately reflects how costs change relative to machine hours.
Initial data for analysis include:
- January: 1,800 machine-hours, $21,500 total costs
- February: 2,900 machine-hours, $23,200 total costs
- March: 1,000 machine-hours, $19,750 total costs
- April: 2,400 machine-hours, $21,000 total costs
- May: 3,400 machine-hours, $23,900 total costs
Applying the High-Low Method
Step 1: Identify the highest and lowest activity levels
The highest activity level is recorded in May with 3,400 machine-hours and total costs of $23,900. The lowest activity level appears in March with 1,000 machine-hours and costs of $19,750.
Step 2: Calculate the variable cost per machine-hour
Using the high and low data points, the variable cost per machine-hour (slope) can be calculated as follows:
\[
\text{Variable Cost per Machine-Hour} = \frac{\text{Cost at High Activity} - \text{Cost at Low Activity}}{\text{Machine Hours at High} - \text{Machine Hours at Low}}
\]
\[
= \frac{23,900 - 19,750}{3,400 - 1,000} = \frac{4,150}{2,400} \approx 1.7292
\]
Thus, the variable cost per machine-hour is approximately \$1.73.
Step 3: Determine the fixed cost component
Using the cost equation:
\[
\text{Total Cost} = \text{Fixed Cost} + (\text{Variable Cost per Machine-Hour} \times \text{Machine Hours})
\]
Substituting the high activity point:
\[
23,900 = \text{Fixed Cost} + 1.73 \times 3,400
\]
\[
23,900 = \text{Fixed Cost} + 5,882
\]
\[
\text{Fixed Cost} = 23,900 - 5,882 = 18,018
\]
Therefore, the fixed cost component is approximately \$18,018.
Final Cost Equation
The cost equation based on the high-low method is:
\[
\boxed{\text{Total Cost} = 18,018 + 1.73 \times \text{Machine Hours}}
\]
This model indicates that for every additional machine hour, costs increase by about \$1.73, starting from a fixed basis of approximately \$18,018.
Conclusion
The high-low method effectively estimates the fixed and variable components of costs in manufacturing. By analyzing data points of machine hours and total costs, the cost equation provides a practical tool for budgeting and forecasting. However, it's essential to recognize that this method utilizes only two data points and assumes linearity, which may not capture all nuances of cost behavior. Developing a comprehensive understanding of costs thus benefits from supplementing the high-low approach with detailed analysis and other estimation methods.
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