STRATEGIC COST MANAGEMENT

PROBLEM 2: High Low Method (HLM)

1. What is the total cost at an activity level of 25,000 units?

LOA (units) Total Cost

High 36,000 200,000
Low 20,000 150,000
Variable & SFC 16,000 50,000
Less SFC (30,000)
Variable Elements 16,000 20,000
VCPU (20,000/16,000) 1.25
Using low (20,000 units)
Total cost 150,000
T.V.C. (1.25 x 20,000) 25,000
Total Fixed Cost 125,000
Output 25,000 units
T.V.C. (1.25 x 25,000) 31,250
Fixed Cost 125,000
Total Cost ₱156,250

2. What is the total cost at an activity level of 34,000 units?

LOA (units)
Output 34,000 units
T.V.C. (1.25 x 34,000) 42,500
Fixed Cost 125,000
167,500
Add SFC 30,000
Total Cost ₱197,500
 PROBLEM 3: High Low Method (HLM)

1. What would be the total cost at a production level of 420 units?

Cost at high level−Cost at low level

Variable cost per unit =
High level activity −Lowlevel activity
5,400−2,160
b=
480−120
3,240
b=
36 0
b = 9/unit
Fixed cost a = P1,080
Highest Activity Lowest Activity
Total cost 5,400 2,160
Less: Variable cost
component
High (480 x 9) 4,320
Low (120 x 9) 1,080
Fixed Cost 1,080 1,080

Total cost at 420 units

y = a + bx
y = 1,080 + (420)(9) + 600
y = 1,080 + 3,780 +600
y = ₱5,460

Total cost at 170 units

y = 1,080 + (170)(9)
y = 1,080 + 1,530
y = ₱2,610

2. What would be the total cost at a production level of 170 units?

Total cost at 170 units
y = 1,080 + (170)(9)
y = 1,080 + 1,530
y = ₱2,610

PROBLEM 4: High Low Method (HLM) and Least Square Method (LSM)
Using high-low method:

1. Determine the cost formula.

Cost at high level−Cost at low level
Variable cost per unit =
High level activity −Lowlevel activity
15,000−12,000
¿
4,200−3,000

15,000−12,000
¿
4,200−3,000
3,000
¿
1,200
= 2.5 per unit
Fixed costs = Total cost at highest activity – (Variable cost per unit x Highest activity stated in
units)
= 15,000 – (4,200 x 2.5)
= 15,000 – 10,500
= 4,500

Cost formula = ₱4,500 + 2.5 per unit

2. What would be the total cost if the company plans to produce 3,500 units?

= 4,500 + (3,500 x 2.5)

= 4,500 + 8,750
Total cost = ₱13,250

Using least square method:

1. Determine the cost formula.
Units Produced Total cost
Month (x) (y) xy x²
36,000,0
1 3,000 12,000 00 9,000,000
63,000,0
2 4,200 15,000 00 17,640,000
64,000,0
3 4,000 16,000 00 16,000,000
45,900,0
4 3,400 13,500 00 11,560,000
36,800,0
5 3,200 11,500 00 10,240,000
35,650,0
6 3,100 11,500 00 9,610,000

20,900 79,500 281,350,000 74,050,000

Where n = 6
∑y= na + b∑x
79,500= 6a + 20,900b

∑xy= ∑xa + b∑x2

281,350,000 = 20,900a + 74,050,000b

-20,900(79,500= 6a + 20,900b)
6(281,350,000 = 20,900a + 74,050,000b)
-1,661,550,000 = - 125,400a - 436,810,000b
1,688,100,000 = 125,400a + 444,300,000b
26,550,000=7,490,000 b
7,490,0007,490,000
VC/unit = b = 3.54
79,500= 6a + 20,900b
79,500= 6a + 20,900(3.54)
79,500= 6a + 73,986
-6a = -79,500 + 73,986
−6 a=−5,514
−6 a−6 a

Total Fixed cost= a = 919

COST FORMULA = ₱919 + 3.54 per unit

2. What would be the total cost if the company plans to produce 3,500 units?

= 919 + (3,500 x 3.54)

= 919 + 12,390
Total Cost = ₱13,309