Exercise7A
Highlowmethod Thisis a way of estimating the cost function by using the cost data ofonly the highest and the lowest values (Colin, 2012). The two linescan be represented graphically and the line connecting the two pointsbecomes the cost function. The relationship that exists is a linearone and of the form y = a + bx where, represents the fixed cost and bis for the variable cost. Highlow method is a method ofdistinguishing the total costs into their respective categories. Thatis fixed and variable costs this is done by analysing the change inactivity and the cost between the highest point and the lowest pointof the group of data.
Therefore,the variable cost b is gotten from the formula
Thereforethe variable cost b, is gotten from the formula
b=
Inthis example, the lowest activity and the lowest cost is that of themonth of August and the highest activity, and highest cost is that ofthe month of September. This implies that
b= = 6.14
Activity
Cost
100 1100
7150
1010
Fromthe above workings, we can deduce that the variable cost b is 6.14per unit, and the fixed cost which is the yintercept is equal to$500.
Thereforethe cost function can be written as y = 500 + 6.14x.
Part2
Inanalysing the costs, I think regression analysis in the best option.Therefore, I would advise the education coordinator to use theregression analysis method. This is because, unlike highlow method,this technique utilizes all the data and hence it is capable ofdealing with more variables.
Exercise72
Revenue$1, 210,000
Variablecost $205,000
Fixedcost $1,100,000
Contribution(Contr) = Total revenue less variable cost
Contr= $1,210,000 – $205,000 = $1,005,000
Part2
Thecontribution margin of the program reveals that it is highlyprofitable since it is having a high profit margin. However, thisprofit margin is to a great extent being reduced by the fixed cost.The net profit which is equal to contribution less fixed cost is(1,005,000 – 1,100,000) = – 95,000 this means that Community CenterMental Health Program is having a net loss. The firm can increase itsnet profit by producing and selling more units of the output.
Exercise73
Calculatingthe Profit – Volume Ratio
Thisis the ratio of contribution over sales (Colin,2012).In the case above the PV ratio of Mental Health Program is
PVratio = = × 100 = 83.06%
Therefore,the Profit – Volume ratio for this program is 0.8306 or 83.06%
Exercise6 – 1
Costallocation (see the attached excel spread sheet for the workings)
Clerical salaries 
Administrative salaries 
Computer services 
Total indirect cost 

Allocation Basis 
A 
B 
C 

Indirect cost to be allocated 
$56,000 
$55,000 
$80,000 
$191,000 
Allocated to 

Physical Therapy (PT) 
30,000 
28,500 
45,000 
103,500 
Occupational Therapy (OT) 
16,000 
18,000 
15,000 
49,000 
Speech Therapy (ST) 
10,000 
8,500 
20,000 
38,500 
Proof Totals (PT) 
$56,000 
$55,000 
$80,000 
$191,000 
Allocation Key: 

A = # Visits (volume): PT= 9600/OT = 4000/ST = 2400/Total = 16000 (16000 × 3.50 = $56000 

B = # Proportion of direct cost: PT = 60%/OT = 25%/ST = 15%/ Total = 100%(% × $55,000) 

C = # Computers in service: PT = 10/OT = 3/ST = 3/Total = 16(16 × $5000 each = $80,000) 
Exercise6 – 2
Thenew cost allocation
Rehab Cost centres 
Direct cost 
Indirect cost 
Totals 
Physical Therapy (PT) 
$406,000 
$103,500 
$509,500 
Occupational Therapy (OT) 
195,000 
49,000 
244,000 
Speech Therapy (ST) 
125,000 
38,500 
163,000 
Total 
$726,000 
$190,000 
$916,000 
References
ColinDrury. (2012). Managementand cost accounting sixth edition.New York: Chapman & Hall Press.