HIGH/ LOW POINT METHOD
Splitting of
semi-variable costs
Included
in semi-variable costs is an element of both fixed and variable costs. In cost
accounting it is important to be able to split these costs and identify the
variable costs separately from the fixed costs and this is achieved by using
the ‘high/low’ method.
The
idea behind the application of the high/low method is that if we agree that
fixed cost doesn’t change based on the activity level, that is, as you produce
more units, the fixed cost will remain the same. So, where the cost changes, as
activity is changing; this will be as a result of the variable costs element.
The high/low method of splitting semi-variable cost
picks the total cost at two different activity levels and finds the additional
cost incurred in making the additional units. The additional cost is then
divided by the number of additional units made and this leads to the variable
cost per unit, which is then used to calculate the total variable and fixed
cost by applying the unit cost to the high or the low activity level.
Question:
Solution:
Additional
cost= £24715-16480= £8235
Additional
units= 3150-1800= 1350
VC/
unit= £8235/1350= £6.10
Total
VC, using the low point= £6.10x1800= £10980
Total
FC, using the low point = £16480-10980= £5500
This
will be applied to all the activity levels in the question:
2100
units x £6.10= £12,810
2600
units x £6.10= £15,860
2900
units x £6.10= £17,690
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