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11 May, 00:19

Using High-Low to Calculate Predicted Total Variable Cost and Total Cost for a Time Period that Differs from the Data Period

Pizza Vesuvio makes specialty pizzas. Data for the past 8 months were collected:

Month Labor Cost Employee Hours

January $7,000 360

February 8,140 550

March 9,899 630

April 9,787 610

May 8,490 480

June 7,450 350

July 9,490 570

August 7,531 310

Assume that this information was used to construct the following formula for monthly labor cost.

Total Labor Cost = $5,237 + ($7.40 x Employee Hours)

Required:

Assume that 4,000 employee hours are budgeted for the coming year. Use the total labor cost formula to make the following calculations:

1. Calculate total variable labor cost for the coming year.

2. Calculate total fixed labor cost for the coming year.

3. Calculate total labor cost for the coming year.

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Answers (1)
  1. 11 May, 02:44
    0
    Instructions are listed below.

    Explanation:

    Giving the following information:

    Data for the past 8 months were collected:

    Month Labor Cost Employee Hours

    January $7,000 360

    February $8,140 550

    March $9,899 630

    April $9,787 610

    May $8,490 480

    June $7,450 350

    July $9,490 570

    August $7,531 310

    Total Labor Cost = $5,237 + ($7.40 x Employee Hours)

    1) To calculate the variable cost we need to use the following formula:

    Variable cost per unit = (Highest activity cost - Lowest activity cost) / (Highest activity units - Lowest activity units)

    Variable cost per unit = (9,899 - 7,000) / (630 - 310) = $9.06 per unit

    2) Fixed costs = Highest activity cost - (Variable cost per unit * HAU)

    Fixed costs = 9,899 - (9.06*630) = $4,191

    Fixed costs = LAC - (Variable cost per unit * LAU)

    Fixed costs = 7,000 - (9.06*310) = $4,191

    3) direct labor hours = 4,000

    Total Labor Cost = $5,237 + ($7.40 x Employee Hours)

    Total Labor Cost = 5,237 + (7.4*4,000) = $34,837
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