# Budget Analysis

Question 3-38, Mixed Cost, Choosing Cost Drivers, and High-Low and Visual-Fit Methods, on p. 121-122

1. Based on the visual-fit method, the Fixed Maintenance Cost based on Units Produced is approximately \$13,000 (shown by the lower end of line). Using one of the points in the graph (indicated by the blue arrow), the Variable Cost per Unit is approximately \$2.25 Per Unit computed as (\$17,500 - \$13,000) / 2,000 units.

This can be express by the cost function: Y = \$13,000 + \$2.25 x No. of Units Produced

On the other hand, the Fixed Maintenance Cost based on number of Setups is approximately \$5,100 (shown by the lower end of line). Using one of the points in the graph (indicated by the blue arrow), the Variable Cost per Unit is approximately \$760 Per Setup computed as (\$26,000 - \$5,100) / 27.5 Setups.

This can be express by the cost function: Y = \$5,100 + \$760 x No. of Setups

The April data is an outlier. Outlier is a nonrepresentative or abnormal observation and thus, should be ignored when analyzing fixed costs.

2. In using high-low method, we should know the exact figures; however, since we are relying on graph, the following answers will be just approximations.

Based on the high-low method, the Fixed Maintenance Cost based on Units Produced is approximately \$11,500 and the Variable Cost per Unit is approximately \$2.50 Per Unit. Please refer to the computation below:

Maintenance Cost Units Produced
High Level Activity                 21,000               3,800
Low Level Activity                 14,500               1,200
Difference                   6,500               2,600

Variable Cost per Unit = \$6,500 / 2,600 units = \$2.50 per unit
Fixed Maintenance Cost = \$21,000 � (3,800 x \$2.50) = \$11,500

This can be express by the cost function: Y = \$11,500 + \$2.50 x No. of Units Produced

On the other hand, based on the high-low method, the Fixed Maintenance Cost based on Number of Setups is approximately \$7,093.75 and...