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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

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BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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Using High-Low to Calculate Fixed Cost, Calculate the Variable Rate, and Construct a Cost Function

Refer to the information for Pizza Vesuvio on the previous page. Pizza Vesuvio’s controller wants to calculate the fixed and variable costs associated with labor used in the restaurant.

Required:

Using the high-low method, calculate the fixed cost of labor, calculate the variable rate per employee hour, and construct the cost formula for total labor cost.

Use the following information for Brief Exercises 3-17 through 3-20:

Pizza Vesuvio makes specialty pizzas. Data for the past 8 months were collected:

Chapter 3, Problem 17BEA, Using High-Low to Calculate Fixed Cost, Calculate the Variable Rate, and Construct a Cost Function

To determine

Compute the value of fixed cost of labor, variable rate per employee hour and prepare the cost formula for total labor cost with the help of high-low method.

Explanation

High Low Method:

The method in which, high and low points of data are used to classify the mixed cost into fixed and variable cost known as high low method. This is one among the three costs of separation methods.

Use the following formula to calculate the value of variable rate per employee:

Variable Rate Per Employee=High CostLow CostHigh Employee HoursLow Employee Hours

Substitute $9,899 for high cost, $7,531 for low cost, 630 hours for high employee hours and 310 for low employee hours in the above formula.

Variable Rate Per Employee=$9,899$7,531630 hours310Hours=$2,368320 hours=$7.40 per employee hour

Therefore, the value of variable rate per employee is $7.40 per employee hour.

Use the following formula to calculate the value of fixed costs:

Fixed Cost=Total Cost(Variable Rate×Employee Hours)

Substitute $7,531 for total cost, $7

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