Al-Firdaus Co. had the following information during 2019: Total Paint Costs R.O. 27,000 Month Factory Machine Hours January 15,900 February 24,200 17,400 March 24,300 16,600 April 27,100 15,600 May 24,400 17,600 June 27,200 16,400 Using the High-Low method, the total fixed costs is: Select one: О а. 600 O b. 800 O . None of the answers are correct O d. 1,200 O e. 1,600
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
High- Low mentod is a way to separate out fixed cost and variable cost. In this method we select highest level of activity and lowest level of activity and compare the total cost at each level.
first we determine Variable cost component :
Highest Activity Cost - Lowest Activity Cost/Highest Activity Units - Lowest Activity Units
Now determit fixed cost component = Highest Activity Cost- (Variable cost*Highest Activity Units )
Now we can compare to calculate high low cost = Fixed Cost + (Variable cost * Unit Activity)
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