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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

In applying the high-low method of Cost estimation, how is the total fixed cost estimated?

To determine

Concept Introduction:

Mixed Costs:

There are three types of costs according to the unit of production; Variable, Fixed and Mixed. Variable costs change proportionally with the number of units produced and variable cost per unit remains constant. Fixed Cost remains same in totality irrespective of the number of units produced.

The mixed cost is the mix of variable and fixed cost, some of its part is fixed and some variable.

High-Low Method:

This method is used to determine the fixed as well as variable part of the mixed cost. The formula for calculation of variable cost per unit is as follows:

   Variable cost per unit =  ( High Cost - Low Cost ) ( High units - low units )

The formula to calculate the Fixed Cost is as follows:

  Fixed Cost = Total cost - (Units×Variable cost per unit)

To Indicate:

The calculation of total fixed cost under high low method

Explanation

There are three types of costs according to the unit of production; Variable, Fixed and Mixed. Variable costs change proportionally with the number of units produced and variable cost per unit remains constant. Fixed Cost remains same in totality irrespective of the number of units produced.

The mixed cost is the mix of variable and fixed cost, some of its part is fixed and some variable.

High-Low Method is used to determine the fixed as well as variable part of the mixed cost. The formula for calculation of variable cost per unit is as follows:

   

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