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Presentation/PPT
27/08/2022
What is the accountant’s estimate of total “overhead” next month if she uses the cost function based on the high-low method?
Charlene is the owner of Charlene’s Computer Care (3C) and has been in the business of servicing computers and computer systems at affordable prices for just over five years. 3C5 primary clients are local businesses but include someresidential customers. Their advertised approach is to analyze the problem, develop a range of IT options, explain their specific recommendation to the customer, and finally estimate the time and costs associated with the service prior to commencing work. Their approach has proven successful, but competition is getting much stiffer, and Charlene is concerned that her approach to determining costs and prices for any particularjob is not correctly incorporating all of the company’s costs. She hasheard about the concept of cost allocation and asks her accountant to create an allocation system for the business. Her accountant decides to implement a single-driver allocation system and needs to develop a reliable cost function to estimate total indirect costs. She will use this estimate for the numerator of the single driver “overhead” rate, and she willuse service hours as the cost driver and denominator in the “overhead” rate. To estimate the parameters of this cost function, the accountant first studied the behavior of last month’s costs, when the company spent 318 service hours repairing 32 computer systems. Here are the results of her analysis: Cost Item Fixed Cost Variable CostUtilities $211 $115Office rent $3,727 $0 Ad ministration Supplies $0Training $353 $349Total $7,721 $3,927 Concerned that last month may not have been a typical month and her breakdown of fixed and variable costs not completely correct, the accountant decided to use the high-low method to create another cost function. She gathered individualcost and service hour data from the last six months; the following were for the two months when costs and service hours were the lowest and the highest: Cost Item low month high month Utilities Office rent Ad ministration Supplies Training $11,052 Service hours Customers Next month, Charlene expects the company to spend 400 hours solving clients’ computer system problems.
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