CMA Study Group

  • 1.  High-Low method for Semivariable

    Posted 10-11-2013 01:39 PM
    This message has been cross posted to the following Discussions: Answer Exchange P2P Support and CMA Study Group .
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    A manufacturing company estimates semi-variable costs by using the high-low method with machine hours as the cost driver. Recent data are shown below.



    If 29,000 machine hours were budgeted for the next period, estimated semi-variable costs would total

    a. €116,250.
    b. €117,000.
    c. €117,500.
    d. €121,220.

    Using Hig-low method, the variable is cost is €3.750 ((€120,000-96000)/(30000-23600), then Fixed costs is: €7,500

    For 29,000 units,  = €7500 + 29000x€3.75 = €116,250 i.e Option A

    But, IMA says, Answer C is correct.  why..?
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    Ganesan Sivalingam
    Accountant
    Sharqiyah Desalination Co SAOG
    Muscat, Sultanate of Oman
    Oman
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  • 2.  RE:High-Low method for Semivariable

    Posted 10-11-2013 02:05 PM
    Sorry, High-low method takes cost driver first then calculates the amount. with that working, Option C is correct.

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    Ganesan Sivalingam
    Accountant
    Sharqiyah Desalination Co SAOG
    Muscat, Sultanate of Oman
    Oman
    -------------------------------------------






    Original Message


  • 3.  RE:High-Low method for Semivariable

    Posted 10-12-2013 07:47 PM
    Would you mind explaining more , because i got what you got first time

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    Marwa Farid Elgammal
    Accountant
    Waterloo ON
    Canada
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    Original Message


  • 4.  RE:High-Low method for Semivariable

    Posted 10-12-2013 10:10 PM
        High volume:   30,000  =  €120,000
    (-) Low volume: (22,000) = (€100,000)
                             ------------------------------
    Variable costs:       8,000 = €20,000
    variable costs per unit : €20,000 / 8000 = €2.5

    Fixed costs = Total costs - Variable costs
                       = €100,000 - 22,000 x €2.5
                        = €100,000 - €55,000
                       = €45,000/-

    For 29,000 units,

    Total costs: Fixed costs + Variable costs
                      = €45,000 + 29,000 x €2.5
                      = €45,000 + €72,500
                      = €117,500

    Option C is correct.
                 
    Note: In the first time, I took difference between highest amount, whereas, difference between highest volume and lowest volume should be considered in High Low method to calculate the independent variable costs and fixed costs

    Ganesan Sivalingam
    Accountant
    Sharqiyah Desalination Co SAOG
    Muscat, Sultanate of Oman
    Oman
    -------------------------------------------






    Original Message


  • 5.  RE:High-Low method for Semivariable

    Posted 10-14-2013 12:18 AM
    Hi Marwa/Ganesan, When you get a question on high low, follow these steps Step1: identify the highest and the lowest activity(not the $ or € value) In this question Highest 30000 machine hours @ €120,000 Lowest 22000 machine hours @ €100,000 Step2: take the difference between high and low You get 8000 machine hours and €20000 Step3: divide €20000/8000 Mh to arrive at variable cost per unit = €2.5/machine hour Step4: now substitute the variable cost into the linear equation for low observation Y = a + bx Where Y represents total cost a represents fixed cost b represents the activity (cost driver in this question machine hours) x represents variable cost per unit 100000=a+22000(2.5) a=45000 which is the fixed cost Now to answer the question, they have asked for the semi variable cost which is nothing but the total cost which is fixed cost + variable cost 45000+ 29000(2.5) =€117,500 which is answer c as per IMA. Hope the explanations was clear. ------------------------------------------- Vinitha Aravind Dubai United Arab Emirates -------------------------------------------
    Original Message