Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 22

Power Drink Inc. produces sports drinks. The accounting manager has decided to implement a high- low costing system to predict future materials handling costs. She has provided you with the following table of costs for the last five years. Which two years should be used for this method?

	2006	2007	2008	2009	2010
Production hours	100,000	138,679	98,843	203,517	188,352
Handling cost ($)	456,233	498,672	507,284	601,678	544,314

Step 1 of 4

High – Low method:

High – Low cost estimation is a method which is used to separate costs into fixed cost and variable costs.

The total cost at any level of activity is to be computed by adding variable cost, fixed cost and mixed cost.

The total costs can be computed by using the following equation:

Here:

Y = Total Costs

a = Fixed costs

b = Variable cost per unit

X = Cost driver