The phone bill for a company consists of both fixed and variable costs. Refer to the 4-month data below and apply the high-low method to determine fixed cost. Month Minutes Total Bill Jan. Feb Mar April B) If the company uses 380 minutes in May, how much will the total be?
The determination of fixed and variable costs is a fundamental aspect of cost analysis in managerial accounting. Understanding how costs behave with changes in activity levels enables managers to make informed budgeting and decision-making processes. One common method for estimating these costs is the high-low method, which uses the periods of highest and lowest activity levels to approximate variable and fixed costs.
Given the data on the company's phone bills over four months, we can apply the high-low method to estimate the fixed monthly cost and the variable cost per minute. Although the original data details are not explicitly numbered or provided in this context, a typical dataset for this scenario might include months with their associated minutes used and total bill amounts.
The high-low method involves selecting the months with the highest and lowest activity levels. The differences in costs between these two periods are attributed to variable costs, which vary proportionally with activity. The fixed costs are then estimated by subtracting the variable costs (based on activity differences) from the total costs at either the high or low activity period.
Suppose, for example, that in the month with the highest minutes of 500, the total bill is $1,200, and in the lowest activity month of 300 minutes, the total bill is $900. The variable cost per minute is calculated as:
Variable Cost per Minute = (Cost at High Activity - Cost at Low Activity) / (High Activity Minutes - Low Activity Minutes) = ($1,200 - $900) / (500 - 300) = $300 / 200 = $1.50 per minute.
Once the variable cost per minute is estimated, the fixed cost can be calculated by substituting either the high or low activity data into the equation:
Fixed Cost = Total Cost - (Variable Cost per Minute x Minutes Used)
Using the high activity month:
Fixed Cost = $1,200 - ($1.50 x 500) = $1,200 - $750 = $450.
Similarly, verify using the low activity month:
Fixed Cost = $900 - ($1.50 x 300) = $900 - $450 = $450.
This confirms that the fixed cost is estimated at $450, and the variable cost per minute is $1.50.
Using the above estimates, if the company uses 380 minutes in May, the total bill can be projected as follows:
Total Estimated Bill = Fixed Cost + (Variable Cost per Minute x Minutes in May) = $450 + ($1.50 x 380) = $450 + $570 = $1,020.
This projection provides a useful prediction for budgeting and cost management, assuming cost behavior remains consistent over time.
Conclusion
The high-low method serves as an effective tool for estimating fixed and variable costs when detailed data is limited. In this scenario, it allows the company to determine that their fixed monthly phone bill is approximately $450, with a variable cost of $1.50 per minute. Using these estimates, the company can forecast costs for different activity levels and make more informed financial decisions.
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