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International Islamic University, Islamabad

Managerial Accounting

Submitted To: Sir Zakir Satti


Submitted By: Hira Mustafa
Registration NO. : 7143-FMS/MBA/F15
Batch: MBA-31

Date: 28th September 2017


Chapter # 2
Managerial Accounting & Cost Concepts

PROBLEM 2-18 Cost Behavior: High & Low Method: Contribution Format
Income Statement
1. Identify each of the companys expenses (including cost of goods sold) as
either variable, fixed or mixed.

Cost of goods sold: Variable expense


Shipping expense: Mixed expense
Advertising expense: Fixed expense
Salaries and commission: Mixed expense
Insurance expense: Fixed expense
Depreciation expense: Fixed expense
2. Using the High Low method, separate each mixed expense into variable
and fixed elements. State the cost formula for each mixed expense.

Shipping expense:
Volume Cost
High 4500 56000
Low 3000 44000
Difference 1500 12000

Per unit variable cost = 12000/1500 = 8 per unit

Variable cost for high volume = 8*4500 = 36000


Variable cost for low volume = 8*3000 = 24000
High Low
Total Cost 56000 44000
Variable Cost 36000 24000
Fixed Cost 20000 20000

Date: 28th September 2017


Salaries & Commission expense:
Volume Cost
High 4500 143000
Low 3000 107000
Difference 1500 36000

Per unit variable cost = 36000/1500 = 24 per unit

Variable cost for high volume = 24*4500 = 108000


Variable cost for low volume = 24*3000 = 72000

High Low
Total Cost 143000 107000
Variable Cost 108000 72000
Fixed Cost 35000 35000

Cost of goods sold:


Volume Cost
High 4500 252000
Low 3000 168000
Difference 1500 84000

Per unit variable cost = 84000/1500 = 56 per unit

3. Redo the company statement at the 4500 unit level of activity using the
contribution format:

Cost of goods sold = 4500*56 = 252000


Salaries & Commission = 4500*24 = 108000
Shipping expense = 4500*8 = 36000

As per cost formula: y = a + bx

Salaries & Commission: 35000 + 4500(24) = 56000


Shipping: 20000 + 4500(8) = 143000

Date: 28th September 2017