The Management Of Harrigill Corporation Would Like To Have A Better Un
The management of Harrigill Corporation seeks to better understand the behavior of its inspection costs in relation to direct labor-hours. Given data includes direct labor-hours and corresponding inspection costs for a nine-month period. Management believes these inspection costs are mixed, comprising both variable and fixed components depending on direct labor-hours. The task is to estimate the variable cost per direct labor-hour and the fixed cost per month using the high-low method, with the requirement to avoid rounding intermediate calculations and to round final answers to two decimal places.
Paper For Above instruction
Understanding the behavior of costs, whether fixed, variable, or mixed, is essential for effective managerial decision-making and cost control. Harrigill Corporation's management is particularly interested in dissecting its inspection costs relative to direct labor-hours, a common basis for activity-based costing. The data provided indicates the total direct labor-hours and inspection costs over a period of several months, which are crucial for analyzing cost behavior patterns using statistical and managerial accounting techniques such as the high-low method.
The high-low method is a straightforward analytical technique used to estimate the variable and fixed components of a mixed cost by focusing on the periods with the highest and lowest levels of activity—in this case, direct labor-hours. This method assumes that the cost behavior between these two points is linear, which simplifies the process of separating the variable and fixed parts of the cost.
Data provided shows the following for nine months:
High activity month: September with 5,690 direct labor-hours and $54,979 inspection costs.
Low activity month: November with 5,256 direct labor-hours and $52,493 inspection costs.
Using the high-low method, the first step involves calculating the variable cost per direct labor-hour (variable rate). This is achieved by dividing the difference in total costs by the difference in direct labor-hours between the high and low points:
Variable cost per direct labor-hour = (Cost at high activity - Cost at low activity) / (Labor hours at high activity - Labor hours at low activity) = ($54,979 - $52,493) / (5,690 - 5,256) = $2,486 / 434 ≈ $5.73 per labor-hour
Next, estimating the fixed monthly cost involves substituting either high or low activity data into the cost equation:
Total cost = (Variable cost per labor-hour * Number of labor-hours) + Fixed cost
Using the high activity data:
$54,979 = ($5.73 * 5,690) + Fixed cost
Fixed cost = $54,979 - ($5.73 * 5,690) = $54,979 - $32,551.70 ≈ $22,427.30
Similarly, using the low activity data for confirmation:
$52,493 = ($5.73 * 5,256) + Fixed cost
Fixed cost = $52,493 - ($5.73 * 5,256) ≈ $52,493 - $30,121.68 ≈ $22,371.32
The close proximity of these two fixed cost estimates validates the assumptions of the high-low method, and the average of these can be used for a more accurate estimate:
Average fixed cost = ($22,427.30 + $22,371.32) / 2 ≈ $22,399.31
Thus, the estimated variable cost per direct labor-hour is approximately $5.73, and the estimated fixed cost per month is approximately $22,399.31.
Implications of Cost Estimation
Understanding the variable component of inspection costs allows Harrigill Corporation to predict costs based on changes in activity levels, which is essential for budgeting, cost control, and pricing strategies. The fixed component provides insight into ongoing costs that remain constant regardless of activity levels in the short term.
Accurate cost estimation like this can influence managerial decisions such as process improvements, staffing, and technology investments. Managers can perform what-if analyses to foresee how fluctuations in direct labor-hours impact overall inspection costs, helping them to optimize operational efficiency.
Furthermore, the high-low method's simplicity makes it accessible for ongoing managerial use, though more sophisticated methods such as regression analysis can provide more precise estimates when the data is more complex or non-linear.
Overall, effective cost analysis tools contribute significantly to strategic planning and operational control
in manufacturing and service environments, aligning cost management with organizational goals.
References
Anthony, R. N., & Govindarajan, V. (2014). Management Control Systems (13th ed.). McGraw-Hill Education.
Drury, C. (2018). Management and Cost Accounting (10th ed.). Cengage Learning.
Horngren, C. T., Datar, S. M., & Rajan, M. (2015). Cost Accounting: A Managerial Emphasis (15th ed.). Pearson.
Hilton, R. W., & Platt, D. (2013). Managerial Accounting: Creating Value in a Dynamic Business Environment (10th ed.). McGraw-Hill Irwin.
Khan, M. Y., & Jain, P. K. (2020). Cost Accounting. McGraw Hill Education.
Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial Accounting (16th ed.). McGraw-Hill Education.
Helm, T. (2008). Cost Accounting. Cambridge University Press.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2018). Financial & Managerial Accounting (3rd European ed.). Wiley.
Simons, R. (2000). Performance Measurement & Control Systems for Implementing Strategy. Pearson. Kaplan, R. S., & Cooper, R. (1998). Cost & Effect: Using Integrated Cost Systems to Drive Profitability and Performance. Harvard Business School Press.