Note re highlow method

# Note re highlow method - volume respectively. (each of...

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High Low Method of Determining the Variable and Fixed Components of a Fixed Cost The method of calculating the variable and fixed components of a mixed cost can be done by assuming the cost function for a given mixed cost is a linear function of the form y = mx + b. We convert this to a cost format by restating it as TC = variable cost/unit * x + TFC. where TC = total cost; TFC = total fixed cost, the fixed component; and x is the volume in units. In math terminology, the variable cost per unit is the slope of the line (m), and the TFC is the y-intercept (where the TC line crosses the y-axis). We find the slope in math by taking the “rise over run”. Steps: 1. From the company records, determine the high volume and low volume from the data for the period. 2. Determine the related cost for the high volume and the related cost for the low
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Unformatted text preview: volume respectively. (each of these is a total cost or TC). 3. Determine the variable component of the cost as follows: Variable Cost (slope of the cost line) = High Vol. Cost Low Vol. Cost High Volume - Low Volume = vc/ unit 4. To calculate the fixed component (TFC or Total Fixed Cost), substitute into the equation. . TC = vc/unit * x + TFC Therefore, TFC = TC - vc/ unit * x Solve for the fixed cost component called TFC TFC = TC - TVC (where vc/unit * x = TVC or total variable cost) where x is either the high volume or low volume and TC is the related high volume cost or low volume cost. It doesnt matter which volume you use as long as you also use the related TC. What we are left with is a TC formula for a mixed cost where we know each of the parameters. Example: TC = \$2,000 + \$1.35 x...
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## This note was uploaded on 03/03/2012 for the course ACCT 2460 taught by Professor Farrar during the Winter '12 term at Conestoga.

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