Student`s

Exercise7A

High-lowmethod- 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. High-low 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 y-intercept 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 high-low method,this technique utilizes all the data and hence it is capable ofdealing with more variables.

Exercise7-2

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.

Exercise7-3

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 &amp Hall Press.