The Metropolis Health System has a system-wide training course for nurse aides. The course requires a packet of materials that MHS calls the training pack. Due to turnover and because the course is system-wide, there is a monthly demand for new packs. In addition the local community college also obtains the training packs used in their credit courses from MHS.
The Education Coordinator needs to know how much of the cost is fixed and how much of the cost is variable for these training packs. She decides to use the high-low method of computation.
Required
Using the monthly utilization information presented below, find the fixed and variable portion of costs through the high-low method.
Number of
Month Training Packs Cost
January 1,000 $6,200
February 200 1,820
March 250 2,350
April 400 3,440
May 700 4,900
June 300 2,730
July 150 1,470
August 100 1,010
September 1,100 7,150
October 300 2,850
November 250 2,300
December 100 1,010
Solution to Practice Exercise 8–1
Step 1. Find the highest volume of 1,100 packs at a cost of $7,150 in September and the lowest volume of 100 packs at a cost of $1,010 in August.
Step 2. Compute the variable rate per pack as:
Training
of Packs Pack Cost
Highest volume 1,100 $7,150
Lowest volume 100 1,010
Difference 1,000 $6,140
Step 3. Divide the difference in cost ($6,140) by the difference in # of packs (1,000) to arrive at the variable cost rate:
$6,140 divided by 1,000 meals = $6.14 per pack.
Step 4. Compute the fixed overhead rates as follows:
At the highest level:
Total cost $7,150
Less: Variable portion
Fixed Portion of Cost $396
At the lowest level:
Total cost $1,010
Less: Variable portion
Fixed Portion of Cost $396
Proof totals: $396 fixed portion at both levels.