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1、Identifying Cost RelationshipsHigh-Low Method,Principles of Cost Analysis and Management,Dale R.Geiger 2011,1,How can we determine which costs are fixed and which are variable?,Dale R.Geiger 2011,2,Terminal Learning Objective,Task:Determine the fixed and variable components of a mixed cost using the
2、 High-Low methodCondition:You are a cost advisor technician with access to all regulations/course handouts,and awareness of Operational Environment(OE)/Contemporary Operational Environment(COE)variables and actors.Standard:with at least 80%accuracyCalculate fixed and variable cost components from mi
3、xed cost dataDescribe High-low method,Dale R.Geiger 2011,3,Need for High-Low Method,Fixed and variable components of cost are not always identifiableThis is especially true in service activitiesSometimes costs arent strictly fixed and variable but mixed or semi-variableThe High-Low Method permits fu
4、rther analysis by finding an approximate value for variable and fixed costs,Dale R.Geiger 2011,4,High-Low Assumptions,The relationship between the cost at the highest level of output and the cost at the lowest level of output is linearThis linear relationship reasonably represents the relationship b
5、etween costs at other levels of outputThe change in cost from the highest level to the lowest level is due to the change in units from the highest level to the lowest:Change in cost/change in units=VC/unit,Dale R.Geiger 2011,5,High-Low Calculation,Step 1:Calculate Variable Cost$/unit:Change in cost/
6、change in units or:$at high output$at low output#Units at high output#Units at low outputStep 2 Calculate Fixed Cost:Total Cost Variable Cost or:$high output VC$/unit*#Units high output,Dale R.Geiger 2011,6,High-Low Calculation,Step 1:Calculate Variable Cost$/unit:Change in cost/change in units or:$
7、at high output$at low output#Units at high output#Units at low outputStep 2 Calculate Fixed Cost:Total Cost Variable Cost or:$high output VC$/unit*#Units high output,Dale R.Geiger 2011,7,High-Low Calculation,Step 1:Calculate Variable Cost$/unit:Change in cost/change in units or:$at high output$at lo
8、w output#Units at high output#Units at low outputStep 2 Calculate Fixed Cost:Total Cost Variable Cost or:Total$high output(VC$/unit*#Units high output),Dale R.Geiger 2011,8,High-Low Calculation,Step 3:Develop the cost expression for total cost:Total cost=VC$/unit*#units+Fixed costThis equation can b
9、e used for:Planning for various levels of outputBreak even analysis(Day 9),Dale R.Geiger 2011,9,Check on Learning,In the High-Low method,the change in cost from the high level of output to the low level of output is assumed to be caused by?How is fixed cost calculated using the High-Low method?,Dale
10、 R.Geiger 2011,10,High-Low Example,The purchasing department shows the following activity for the last four months:MonthPOs ProcessedTotal CostsJan100$2500Feb802200Mar1203000April1052750,Dale R.Geiger 2011,11,High-Low Example,The manager of the purchasing department sees that total costs increase as
11、 Purchase Orders increase However,he knows that the cost is not strictly variableHe would like to segregate the variable component of the cost from the fixed cost,Dale R.Geiger 2011,12,Graph of Actual Costs,Cost at 120 POs=$3000,Cost at 80 POs=$2200,X-Axis represents number of Purchase Orders,Dale R
12、.Geiger 2011,13,Multiple Linear Relationships Exist,Essentially any two points on the graph represent a linear relationship,X-Axis represents number of Purchase Orders,Dale R.Geiger 2011,14,High-Low Relationship,High-Low Method assumes the relationship between highest point and lowest point is repre
13、sentative of the whole,X-Axis represents number of Purchase Orders,Dale R.Geiger 2011,15,Calculate Unit Variable Cost,Change in Cost/Change in Units=Total$at high output Total$at low output#Units at high output#Units at low output=($3000$2200)/(120 units 80 units)=$800/40 units=$20/unit,Dale R.Geige
14、r 2011,16,Calculate Unit Variable Cost,Change in Cost/Change in Units=Total$at high output Total$at low output#Units at high output#Units at low output=($3000$2200)/(120 units 80 units)=$800/40 units=$20/unit,Dale R.Geiger 2011,17,Calculate Unit Variable Cost,Change in Cost/Change in Units=Total$at
15、high output Total$at low output#Units at high output#Units at low output=($3000$2200)/(120 units 80 units)=$800/40 units=$20/unit,Dale R.Geiger 2011,18,Calculate Fixed Cost,Total Cost Variable Cost=Total$high output VC$/unit*#Units high output=$3000($20/unit*120 units)$3000($20/unit*120 units)$3000(
16、$20*120)$3000$2400=$600,Dale R.Geiger 2011,19,Calculate Fixed Cost,Total Cost Variable Cost=Total$high output VC$/unit*#Units high output=$3000($20/unit*120 units)$3000($20/unit*120 units)$3000($20*120)$3000$2400=$600,Dale R.Geiger 2011,20,Calculate Fixed Cost,Total Cost Variable Cost=Total$high out
17、put VC$/unit*#Units high output=$3000($20/unit*120 units)$3000($20/unit*120 units)$3000($20*120)$3000$2400=$600,Dale R.Geiger 2011,21,Calculate Fixed Cost,Total Cost Variable Cost=Total$high output VC$/unit*#Units high output=$3000($20/unit*120 units)$3000($20/unit*120 units)$3000($20*120)$3000$2400
18、=$600,Dale R.Geiger 2011,22,Express the Mixed Cost Relationship,Total Cost=VC$/Unit*#Units+Fixed CostTotal Cost=$20/Unit*#Units+$600,Dale R.Geiger 2011,23,Express the Mixed Cost Relationship,Total Cost=VC$/Unit*#Units+Fixed CostTotal Cost=$20/Unit*#Units+$600,Dale R.Geiger 2011,24,Using the Cost Exp
19、ression,For planning:If planned output in May is 60 purchase orders,what is our expected cost?$20/PO*60 POs+$600=$1800If planned output in June is 130 purchase orders?$20/PO*130 POs+$600=$3200,Dale R.Geiger 2011,25,Using the Cost Expression,For planning:If planned output in May is 60 purchase orders
20、,what is our expected cost?$20/PO*60 POs+$600=$1800If planned output in June is 130 purchase orders?$20/PO*130 POs+$600=$3200,Dale R.Geiger 2011,26,Using the Cost Expression,For planning:If planned output in May is 60 purchase orders,what is our expected cost?$20/PO*60 POs+$600=$1800If planned outpu
21、t in June is 130 purchase orders?$20/PO*130 POs+$600=$3200,Dale R.Geiger 2011,27,Using the Cost Expression,For comparison and learningAprils cost of$2750 for 105 POs was higher than expected.Why?Expected cost=$20/PO*105 POs+$600=$2700Januarys cost of$2500 for 100 POs was lower than expected.Why?Expe
22、cted cost=$20/PO*100 POs+$600=$2600What did we do differently?What can we learn?,Dale R.Geiger 2011,28,Using the Cost Expression,For comparison and learningAprils cost of$2750 for 105 POs was higher than expected.Why?Expected cost=$20/PO*105 POs+$600=$2700Januarys cost of$2500 for 100 POs was lower
23、than expected.Why?Expected cost=$20/PO*100 POs+$600=$2600What did we do differently?What can we learn?,Dale R.Geiger 2011,29,Using the Cost Expression,For comparison and learningAprils cost of$2750 for 105 POs was higher than expected.Why?Expected cost=$20/PO*105 POs+$600=$2700Januarys cost of$2500
24、for 100 POs was lower than expected.Why?Expected cost=$20/PO*100 POs+$600=$2600What did we do differently?What can we learn?,Dale R.Geiger 2011,30,Using the Cost Expression,For comparison and learningAprils cost of$2750 for 105 POs was higher than expected.Why?Expected cost=$20/PO*105 POs+$600=$2700
25、Januarys cost of$2500 for 100 POs was lower than expected.Why?Expected cost=$20/PO*100 POs+$600=$2600What did we do differently?What can we learn?,Dale R.Geiger 2011,31,Check on Learning,What might cause a difference between the expected cost using High-Low and the actual cost?,Dale R.Geiger 2011,32,Practical Exercise,Dale R.Geiger 2011,33,Dale R.Geiger 2011,34,Enter and Filter Data to identify if relationship is reasonably linear,The spreadsheet calculates the Variable and Fixed portions of the cost,Practical Exercise,Dale R.Geiger 2011,35,
