Chapter 2, Problem 27C

To determine

High-low method: High-low method is a method of calculating the variable cost and the fixed cost of a product or service. The calculation of this method is based on the total production/activity cost and the lowest production/activity cost of the product during any period.

Variable Cost: Variable cost is a cost that changes when the volume of production changes, in the same direction and in the same proportion.

Fixed Cost: Fixed cost is a cost that remains constant irrespective of changes in the production volume.

Scattergraph: Scattergraph is graph or chart that represents the relationship between two variables for a given set of data.

1. Plot the direct labor cost and units produced on a scattergraph.
2. Plot the direct labor cost and number of days paid on a scattergraph.
3. Identify the measure of activity - number of units produced or paid days − that should be used as the activity base for explaining direct labour cost.