Which computation do you believe is better

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Reference no: EM133560544

Analyzing Mixed Costs

The Metropolis Health System has a system-wide training course for nurse aides. The course requires a packet of materials that MHS calls the training pack. Due to turnover and because the course is system-wide, there is a monthly demand for new packs. In addition, the local community college also obtains the training packs used in their credit courses from MHS.

The Education Coordinator needs to know how much of the cost is fixed and how much of the cost is variable for these training packs. She decides to use the high-low method of computation.

Example: Using the monthly utilization information presented below, find the fixed and variable portion of costs through the high-low method.

Number of
Month Training Packs Cost

January 1,000 $6,200

February 200 1,820

March 250 2,350

April 400 3,440

May 700 4,900

June 300 2,730

July 150 1,470

August 100 1,010

September 1,100 7,150

October 300 2,850

November 250 2,300

December 100 1,010

Solution to Practice Exercise 8-1

Step 1. Find the highest volume of 1,100 packs at a cost of $7,150 in September and the lowest volume of 100 packs at a cost of $1,010 in August.

Step 2. Compute the variable rate per pack as:

Training
# of Packs Pack Cost

Highest volume 1,100 $7,150

Lowest volume 100 1,010

__________________

Difference 1,000 $6,140

Step 3. Divide the difference in cost ($6,140) by the difference in # of packs (1,000) to arrive at the variable cost rate:

$6,140 divided by 1,000 meals = $6.14 per pack.

Step 4. Compute the fixed overhead rates as follows:

At the highest level:

Total cost $7,150

Less: Variable portion

[1,100 packs × $6.14 @] (6,754)

______

Fixed Portion of Cost $396

At the lowest level:

Total cost $1,010

Less: Variable portion

[100 packs × $6.14 @] (614)

______

Fixed Portion of Cost $396

Proof totals: $396 fixed portion at both levels.

Assignment Exercise 8-1: Analyzing Mixed Costs

The Education Coordinator decides that the Community College packs may be unduly influencing the high-low computation. She decided to re-run the results omitting the Community College volume.

Required

1. Using the monthly utilization information presented below, and omitting the Community College training packs, find the fixed and variable portion of costs through the high-low method. Note that the college only acquires packs in three months of the year: January, May, and September. These dates coincide with the start dates of their semesters and summer school.

2. The reason the Education Coordinator needs to know how much of the cost is fixed is because she is supposed to collect the appropriate variable cost from the Community College for their packs. For her purposes, which computation do you believe is better? Why?

Reference no: EM133560544

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