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Frias - Chapter 2

The document discusses using the high-low method and least squares method to determine the total cost formula for a company based on its historical production and total cost data. The high-low method results in a total cost formula of ₱4,500 + 2.5 per unit, while the least squares method gives a formula of ₱919 + 3.54 per unit. Applying these formulas, the total cost of producing 3,500 units is estimated to be ₱13,250 using the high-low method and ₱13,309 using the least squares method.

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Lars Frias
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51 views5 pages

Frias - Chapter 2

The document discusses using the high-low method and least squares method to determine the total cost formula for a company based on its historical production and total cost data. The high-low method results in a total cost formula of ₱4,500 + 2.5 per unit, while the least squares method gives a formula of ₱919 + 3.54 per unit. Applying these formulas, the total cost of producing 3,500 units is estimated to be ₱13,250 using the high-low method and ₱13,309 using the least squares method.

Uploaded by

Lars Frias
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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STRATEGIC COST MANAGEMENT

PROBLEM 2: High Low Method (HLM)


1. What is the total cost at an activity level of 25,000 units?

LOA (units) Total Cost


High 36,000 200,000
Low 20,000 150,000
Variable & SFC 16,000 50,000
Less SFC (30,000)
Variable Elements 16,000 20,000
VCPU (20,000/16,000) 1.25
Using low (20,000 units)
Total cost 150,000
T.V.C. (1.25 x 20,000) 25,000
Total Fixed Cost 125,000
Output 25,000 units
T.V.C. (1.25 x 25,000) 31,250
Fixed Cost 125,000
Total Cost ₱156,250

2. What is the total cost at an activity level of 34,000 units?

LOA (units)
Output 34,000 units
T.V.C. (1.25 x 34,000) 42,500
Fixed Cost 125,000
167,500
Add SFC 30,000
Total Cost ₱197,500
PROBLEM 3: High Low Method (HLM)

1. What would be the total cost at a production level of 420 units?

ℎ ℎ −
=
ℎ −
5,400 − 2,160
=
480 − 120
3,240
=
360
b = 9/unit
Fixed cost a = P1,080
Highest Activity Lowest Activity
Total cost 5,400 2,160
Less: Variable cost
component
High (480 x 9) 4,320
Low (120 x 9) 1,080
Fixed Cost 1,080 1,080

Total cost at 420 units


y = a + bx
y = 1,080 + (420)(9) + 600
y = 1,080 + 3,780 +600
y = ₱5,460

Total cost at 170 units


y = 1,080 + (170)(9)
y = 1,080 + 1,530
y = ₱2,610

2. What would be the total cost at a production level of 170 units?


Total cost at 170 units
y = 1,080 + (170)(9)
y = 1,080 + 1,530
y = ₱2,610
PROBLEM 4: High Low Method (HLM) and Least Square Method (LSM)

Using high-low method:

1. Determine the cost formula.


ℎ ℎ −
=
ℎ −
15,000 − 12,000
=
4,200 − 3,000

15,000 − 12,000
=
4,200 − 3,000
3,000
=
1,200

= 2.5 per unit


Fixed costs = Total cost at highest activity – (Variable cost per unit x Highest
activity stated in units)
= 15,000 – (4,200 x 2.5)
= 15,000 – 10,500

= 4,500

Cost formula = ₱4,500 + 2.5 per unit

2. What would be the total cost if the company plans to produce 3,500
units?

= 4,500 + (3,500 x 2.5)


= 4,500 + 8,750
Total cost = ₱13,250
Using least square method:

1. Determine the cost formula.


Units Produced Total cost
Month (x) (y) xy x²

1 3,000 12,000 36,000,000 9,000,000

2 4,200 15,000 63,000,000 17,640,000

3 4,000 16,000 64,000,000 16,000,000

4 3,400 13,500 45,900,000 11,560,000

5 3,200 11,500 36,800,000 10,240,000

6 3,100 11,500 35,650,000 9,610,000

20,900 79,500 281,350,000 74,050,000

Where n = 6
∑y= na + b∑x
79,500= 6a + 20,900b

∑xy= ∑xa + b∑x2


281,350,000 = 20,900a + 74,050,000b

-20,900(79,500= 6a + 20,900b)
6(281,350,000 = 20,900a + 74,050,000b)

-1,661,550,000 = - 125,400a - 436,810,000b


1,688,100,000 = 125,400a + 444,300,000b

26,550,000 = 7,490,000 b
7,490,000 7,490,000

VC/unit = b = 3.54

79,500= 6a + 20,900b
79,500= 6a + 20,900(3.54)
79,500= 6a + 73,986
-6a = -79,500 + 73,986
&'( ) &*,*+,
&'( &'(

Total Fixed cost= a = 919

COST FORMULA = ₱919 + 3.54 per unit

2. What would be the total cost if the company plans to produce


3,500 units?

= 919 + (3,500 x 3.54)


= 919 + 12,390
Total Cost = ₱13,309

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