Jackson Inc. is preparing a flexible budget for 2017 and requires a breakdown of the cost of steam used in its factory into the fixed and variable elements. The following data on the cost of steam used and direct manufacturing labor hours worked are available for the last 6 months of 2016:

 Jackson Inc. is preparing a flexible budget for 2017 and requires a breakdown of the cost of steam used in its factory into the fixed and variable elements.  The following data on the cost of steam used and direct manufacturing labor hours worked are available for the last 6 months of 2016:



Month    Cost of steam    Direct manufacturing labor hours
July    $15,850    3,000
August      13,400    2,050
September      16,370    2,900
October      19,800    3,650
November      17,600    2,670
December      18,500    2,650




Assuming that Jackson uses the high-low points method of analysis, the estimated variable cost of steam per direct manufacturing labor hour should be
$4.00 correct
$5.42
$5.82
$6.00
 You Answered Correctly!
This answer is correct. The high-low method separates a mixed cost into its variable and fixed components.  The initial step in the high-low method utilizes a formula to find the variable rate.  The formula used in developing the variable rate is



Cost at high point – Cost at low point

High activity point – Low activity point    =    Variable rate




In this problem, the cost of steam is given at several levels of the designated activity, direct manufacturing labor hours (DMLH).  Substituting into the formula gives the variable cost of steam per direct manufacturing labor hour.



            $19,800 – $13,400                =    $4.00/DMLH
3,650 DLH – 2,050 DMLH

When using a flexible budget, a decrease in production levels within a relevant range

 When using a flexible budget, a decrease in production levels within a relevant range
Decreases variable cost per unit.
Decreases total costs.
Increases total fixed costs.
Increases variable cost per unit.
 You Answered Correctly!
Total costs decrease when production decreases. The decrease equals the decline in total variable costs resulting from the production of fewer units. Fixed costs are assumed to be constant.

When production levels are expected to increase within a relevant range, and a flexible budget is used, what effect would be anticipated with respect to each of the following costs?

 When production levels are expected to increase within a relevant range, and a flexible budget is used, what effect would be anticipated with respect to each of the following costs?

 You Answered Correctly!

 
Total fixed costs are a constant amount in the relevant range. Therefore, when increasing production levels within that range, cost per unit decreases. Fixed costs per unit are not useful for prediction purposes because they change as production levels change.

Variable costs per unit are a constant amount in the relevant range. But total variable costs increase in constant proportion to increases in production. Variable costs are useful for forecasting because unit costs are reasonably constant in the relevant range, allowing for direct predictions of total variable cost at any level in the range.