EXAMPLES AND SOLUTIONS

QUESTION 1
The manager of a logistics company uses the high-low technique to separate fixed and
variable maintenance costs.
The following data is available:
Month Vehicle working hours Maintenance costs, R
January 8500 35867
February 8000 34400
March 8800 36747
April 9200 37921
May 9458 38678
June 8200 34987
July 8695 36439
August 9313 38252
September 9983 40218

Required:
1.1. Calculate the variable cost per hour.
1.2. Calculate the monthly fixed costs for the company by using the figures for June.
1.3. The service manager has reminded you that the budget for this year indicates that
the scheduled vehicle working hours for October was planned for 10 200. Calculate the
total maintenance cost for the company for October.

SOLUTION:

Straight line
41000
40000
f(x) = 2.93394515896737 x + 10928.4699393249
39000
38000
Total costs, R

37000
36000
35000
34000
33000
32000
31000
7500 8000 8500 9000 9500 10000 10500
Output, Units

1.1. Calculate the variable cost per hour.

 Month Vehicle working hours Maintenance costs, R
January 8500 35867
February 8000 34400
March 8800 36747
April 9200 37921
May 9458 38678
June 8200 34987
July 8695 36439
August 9313 38252
September 9983 40218

Month Vehicle working hours Maintenance costs, R

Highest Activity September 9983 40218
level
Lowest Activity level February 8000 34400
Difference 1983 5818

Highest Maintenance cost−Lowest Maintenance cost

Variable maintenance cost per hour =
Highest activity−Lowest activity
R 40 218−R 34 400
¿
9 983 hours−8 000 hour s
R 5 818
¿
1983 hour s
¿ R 2.93 39 per hour

1.2. Calculate the monthly fixed costs for the company by using the figures for June.

¿ cost s=Total costs−Variable cost per hour ×total number of hours

¿ cost s ( using the highest value )=R 40218−R 2.9339 ×9983=R 10 928.9 ≈ R 10 929

¿ cost s ( using thelowest value )=R 3 4 400−R 2.9339 ×8 000=R 10 928.8≈ R 10 929

Thus , the monthly ¿ maintenance cost is approximately R 10 929

1.3. The service manager has reminded you that the budget for this year indicates
that the scheduled vehicle working hours for October was planned for 10 200.
Calculate the total maintenance cost for the company for October.
Using the monthly fixed cost and monthly variable cost per hour computed above, we
can calculate the Total maintenance cost for October as:

Total Maintenance Costs for October = Fixed cost + Variable cost per hour x total
number of hours in October

= R10 929 + R2.9339 x 10 200

= R40 855

QUESTION 2
Below, are the total costs and activity levels for 3 months:

Month Total Costs in Rand Units

July 72 500 1 250
August 80 000 1 300
September 68 750 1 175

There is a step up of R5 000 when unit production crosses 1 275 units.

Required:
2.1. What is the variable cost per unit?
2.2. What is the fixed cost at 1 300 units?
2.3. What is the total cost of 1400 units?

SOLUTION:
2.1. What is the variable cost per unit?

Cost before stepped increase ( Always use the highest level ‼)=R 80 000−R 5 000=R 75 000

R 75 000−R 68 750 R 6 250

Variable monthly cost per unit = = =R 50 per unit
1 300−1175 125 units

2.2. What is the fixed cost at 1,300 units?

¿ costs=¿ R80 000 – R50 x 1300 = R15 000

2.3. What is the total cost of 1400 units?

Total costs=Variable cost+ ¿ costs=R 50 ×1 400+ R 15 000=R 85 000
QUESTION 3
Tracy has a small company manufacturing children’s wooden furniture. She has given
you the information below and asked that you help organise the data so that it makes
sense for her management information:

Expense Total spent, R

Wood carvers’ wage 125 000
Rent paid for the production premises 72 000
Electricity paid for the production premises 12 500
Wood issued to the wood carvers 26 000
Lease on the administration computer 1 800
Advertising on the local radio station 4 000
Audit fees paid 2 000

Required:
Calculate the following (Show all formulas and calculations)

3.1. Calculate the prime costs.

Prime cost=Direct Labour Cost + Direct Material cost=R 125 000+ R 26 000=R151 000

OR

R
Wood carvers’ wage 125 000
Wood issued to the wood carvers 26 000
Prime cost 151 000

3.2. Calculate the manufacturing overhead costs.

Manufacturing overheads=Electricity paid+ Rent=R 1 2500+ R 72 000=R 84 500

OR

R
Rent paid for the production premises 72 000
Electricity paid for the production premises 12 500
Manufacturing overheads 84 500

3.3. Calculate the conversion costs.

Conversion costs=Direct Labour Cost + Manufacturing overheads=R 125 000+ R 84 5 0 0=R 209 500

OR

R
Wood carvers’ wage 125 000
Rent paid for the production premises 72 000
Electricity paid for the production premises 12 500
Manufacturing overheads 209 500

3.4. Calculate the total manufacturing costs.

Manufacturing costs=Prime cost+ Manufacturing overheads=R 151 000+ R 84 500=R 235500

OR

R
Wood carvers’ wage 125 000
Rent paid for the production premises 72 000
Electricity paid for the production premises 12 500
Wood issued to the wood carvers 26 000
Manufacturing costs 235 500

3.5. Calculate the total non-manufacturing costs.

Non−m anufacturing costs=Lease on admin computer + Advertisement + Audit
¿ R 18 00+ R 4 0 00+ R 2 000
¿ R 7 8 00

OR

R
Lease on the administration computer 1 800
Advertising on the local radio station 4 000
Audit fees paid 2 000
Non-manufacturing costs 7 800

QUESTION 4
Mercer Limited incurred the following inspection costs for the first six months of 2021:
 Month Units produced Costs, R
January 42 000 147 000
Februar 48 000 162 000
y
March 24 000 90 000
April 30 000 108 200
May 60 000 198 000
June 54 000 183 000

Required:
Calculate the variable cost per unit and the fixed cost per month using simple regression
analysis.

SOLUTION:

Month Units produced, x Costs, y xy x2

January 42 000 147 000 6174000000 1764000000 2160
February 48 000 162 000 7776000000 2304000000 2624
March 24 000 90 000 2160000000 576000000 810
April 30 000 108 200 3246000000 900000000 1170
May 60 000 198 000 11880000000 3600000000 3920
June 54 000 183 000 9882000000 2916000000 3348
258 000 888 200 41 118 000 000 12 060 000 000 140 353

n ∑ xy−( ∑ x )( ∑ y ) 6× 4 1 118 00 0 000− (2 58 0 00 ) ( 888 200 ) 1 7 552 400 000

b= 2
= 2
= =3.028364389≈ 3.03
n ∑ x −( ∑ x )
2
6 ×12 06 0 000 000−( 258 0 00 ) 5 7 96 00 0 000

a=
∑ y−b ∑ x = 888 200−(3.03)(2 58 0 00) ≈ 17 743
n 6

y=3.03 ×+17 743.3

Variable cost per unit =R3.03

¿ cost=R 17 743