Required: (a) Use the high-low method to estimate the cost behaviour for the complex’s electricity costs, assuming that the variable costs vary in proportion to the hours of operation. Express the total cost behaviour in formula form (Y = a + bx). What is the variable electricity cost per hour of operation? (b) During July, the complex will open for 570 hours. Predict the complex’s total electricity costs for July using the cost estimation method employed in above requirement (a). (c) What is the main drawback of the high-low method of cost estimation?
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.
Brisbane Indoor Sports, a sporting complex, has opening hours that fluctuate from month
to month. The electricity costs and hours of operation for past six months is listed below:
Month Total hours of operation Total electricity cost
January 650 $ 4 240
February 700 $ 4 400
March 800 $ 4 800
April 600 $ 4 200
May 550 $ 3 700
June 500 $ 3 600
Required:
(a) Use the high-low method to estimate the cost behaviour for the complex’s electricity
costs, assuming that the variable costs vary in proportion to the hours of operation.
Express the total cost behaviour in formula form (Y = a + bx). What is the variable
electricity cost per hour of operation?
(b) During July, the complex will open for 570 hours. Predict the complex’s total electricity
costs for July using the cost estimation method employed in above requirement (a).
(c) What is the main drawback of the high-low method of cost estimation?
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