Behavior of Costs Sample Problems

High-Low Method
The controller of PATAY Hospital would like to come up with a cost formula that links admitting department cost to the number of patients admitted during a month. The admitting department’s costs and the number of patients admitted during the past nine months follow:
Month Number of Patients Admitted Admitting Department’s Cost
April 18 P 15, 600
May 19 P 15, 200
June 17 P 13, 700
July 15 P 14, 600
August 15 P 14, 300
September 11 P 13, 200
October 11 P 12, 800
November 48 P 72, 500
December 16 P 14, 000

REQUIRED: Using the high-low method, determine:
1. The variable costs per unit.
2. The annual fixed costs.
3. The admitting department’s monthly cost function.
4. Total estimated costs, if number of patients admitted for the month is 20. (Adapted: Managerial Accounting by Garrison & Noreen)
Suggested Solutions:
1. b = 15,200 – 12,800 / 19 – 11 b = 2,400 / 8 b = 300
2. TC = VC + FC
TC = 300(X) + FC
12,800 = 300(11) + FC
12,800 = 3,300 + FC
FC = 12,800 – 3,300
FC = 9,500 per month
Annual: P9,500 x 12 = P114,000
3. Y = 300X + 9,500
4. TC = 300(20) + 9,500
TC = 6,000 + 9,500
TC = 15,500
Least-Squares Regression Method
Makabuhay Funeral Homes’ total overhead costs at various levels of activity are presented below:

Month Machine Hours Total Overhead Costs
March 500 P 970
April 400 P 851
May 600 P 1,089
June 700 P 1, 208
REQUIRED:
1. Using the least-squares method, determine the cost function for total overhead costs.
2. What would be the total overhead costs if operating level is 450 machine hours? (Adapted: Managerial Accounting by Garrison & Noreen)

Suggested Solutions:

X Y XY X2 500 970 485,000 250,000 400 851 340,400 160,000 600 1,089 653,400 360,000 700 1,208 845,600 490,000
SUM 2,200 4,118 2,324,400 1,260,000
N = 4

1. 4,118 = 4A + 2,200B
2,324,400 = 2,200A + 1,260,000B