1. @ 2012, Cengage Learning Cost Behavior and Cost-Volume-Profit Analysis LO 1b – Using the High- Low Method to Separate Fixed and Variable Costs

2.  The high-low method is a cost estimation method that may be used to separate mixed costs into their fixed and variable components. Mixed Costs LO 1

3. Mixed Costs LO 1 The number of units produced is the activity base, and the relevant range is the units produced between June and October. The next four slides illustrate how the high-low method is used to determine the fixed and variable costs.

4. Mixed Costs LO 1 First, select the highest level of activity. ProductionTotal (Units) Cost June1,000$45,550 July1,50052,000 August2,10061,500 September1,80057,500 October75041,250 Actual costs incurred Variable Cost per Unit = Difference in Total Cost Difference in Production

5. Mixed Costs LO 1 Second, select the lowest level of activity. ProductionTotal (Units) Cost June1,000$45,550 July1,50052,000 August2,10061,500 September1,80057,500 October75041,250 Actual costs incurred Variable Cost per Unit = Difference in Total Cost Difference in Production

6. Mixed Costs LO 1 ProductionTotal (Units) Cost June1,000$45,550 July1,50052,000 August2,10061,500 September1,80057,500 October75041,250 Next, fill in the formula for difference in total cost. $61,500 41,250 $20,250 Variable Cost per Unit = Difference in Total cost Difference in Production

7. Mixed Costs LO 1 2,100 750 1,350 Then, fill in the formula for difference in production. ProductionTotal (Units) Cost June1,000$45,550 July1,50052,000 August2,10061,500 September1,80057,500 October75041,250 Variable Cost per Unit = $20,250 Difference in Production

8. Mixed Costs LO 1 Variable cost per unit is $15 ProductionTotal (Units) Cost June1,000$45,550 July1,50052,000 August2,10061,500 September1,80057,500 October75041,250 = $15 Variable Cost per Unit = $20,250 1,350

9. Mixed Costs LO 1 The fixed cost is estimated by subtracting the total variable costs from the total costs for the units produced as shown below: Fixed Cost = Total Costs – (Variable Cost per Unit x Units Produced)

10. Mixed Costs LO 1 The fixed cost is the same at the highest and the lowest levels of production as shown below for Kason Inc. Fixed Cost = $61,500 – ($15 x 2,100 units) Fixed Cost = $61,500 – $31,500 Fixed Cost = $30,000 Highest Level Fixed Cost = Total Costs – (Variable Cost per Unit x Units Produced)

11. Mixed Costs LO 1 With fixed costs and variable costs estimated at $30,000 plus $15 per unit, a formula is in place to estimate production at any level. If the company is expected to produce 2,000 units in November, the estimated total cost would be calculated as follows: Total Cost = ($15 x 2,000) + $30,000 Total Cost = $30,000 + $30,000 Total Cost = $60,000 Total Cost = ($15 x Units Produced) + $30,000

12. Total Variable Costs Total Units Produced Unit Variable Costs Total Units Produced Per-Unit Cost Total variable costs increase and decrease proportionately with activity level. Per-unit variable costs remain the same regardless of activity level. Total Costs Summary of Cost Behavior Concepts LO 1

13. Total Units Produced Total Costs Total Units Produced Total fixed costs remain the same regardless of activity level. Per-unit fixed costs decrease as activity level increases. Total Fixed Costs Unit Fixed Costs Per-Unit Cost Summary of Cost Behavior Concepts LO 1