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Management Accounting
SESSION 4
Study Methodology & Class Discipline

• Ensure you attend class with A PEN, A NOTEBOOK AND A CALCULATOR.

• At IBA we follow Blended Learning Methodology, we will make use of online
resources available like videos, MOOCs, etc as a part of our learning.
• Concepts will be thoroughly explained. If you have any questions, please do not
hesitate to ask.
• Some numerical problems may be solved in the class but the responsibility of
attempting remaining exercises and problems rests with the students
• In Accounting, PRACTICE is essential to gauge the concepts clearly.
• You will NOT be allowed to use phones and/or laptops during the class.
• Attendance can be taken at anytime during the class.
• You are NOT allowed to leave the class after the attendance has been taken.
Determining the fixed & variable elements of
semi-variable costs by High-low method

Cost accountants tend to separate semi-variable costs into their variable and
fixed elements.

variable cost / unit = Total cost* at high activity level - total cost* at low activity
Total units at high activity level - total units at low activity

The fixed part of the mixed cost can be determined as follows

Fixed Costs = Total Cost at an activity level – (Units at activity level x Variable
cost/unit)
*Total cost excludes the step-fixed cost component
The high-low method

QUESTION:
Dynamic Ltd. has recorded the following total costs during the last five years.
Year Output volume Total cost
Units $
2013 65,000 145,000
2014 80,000 160,000
2015 90,000 170,000
2016 60,000 140,000
2017 75,000 155,000

Requirement:
Calculate the total cost that should be expected in 2018 if output is 85,000 units.
High-low method with stepped fixed costs

QUESTION:
The following data relate to the overhead expenditure of contract cleaners (for
industrial cleaning) at two activity levels.
Square metres cleaned 12,750 15,100
Overheads $73,950 $83,585

When more than 14,000 square metres are industrially cleaned, there will be a
step up in fixed costs of $4,700.
Requirement:
Calculate the estimated total cost if 14,500 square metres are to be
industrially cleaned.
The high-low method

QUESTION:
The Washington Company incurred Rs. 50,000 to ship 22,000 liters
and Rs. 42,000 to ship 18,000 liters.

Requirement:
Calculate the expected shipping expense if the company ships
20,000 liters.
The high-low method
QUESTION:
An organisation has the following total costs at two activity levels:
Units Cost (Rs)
15,000 380,000
24,000 470,000

Variable cost per unit is constant in this activity range but there is a
step up cost of Rs. 18,000 when the activity exceeds 20,000 units.
Requirement:
What are the total costs at an activity level of 18,000 units?
The high-low method

QUESTION:
ABC Co has a manufacturing capacity of 10,000 units. The flexed
production cost budget of the company is as follows:
Capacity 60% 100%
Total production costs (Rs.) 11,280 15,120

Requirement:
What is the budgeted total production cost if the company operates
at 85% capacity?
 The high-low method
QUESTION:
V Ltd buys IT support services from an outside agency. In its last four accounting periods, the
charges made by the agency have been as follows:
Period Usage Charge for services
(hours) Rs.
1 3,700 16,700
2 4,900 20,300
3 3,250 15,350
4 5,800 23,000
 
The agency did not increase its charging rates in periods 1 to 4. It has notified V Ltd that, in
period 5, it will increase the fixed element of the charge by 5% and the variable element by
10%.
If V Ltd estimates its level of usage at 5,500 hours in period 5, what will be the expected
charge for IT support services?
 The high-low method
QUESTION:
An organisation has the following total costs at three activity levels:

Activity level (units) 8,000 12,000 15,000

Total cost (Rs.) 204,000 250,000 274,000
 
Variable cost per unit is constant within this activity range and there is a step up
cost 10% of fixed costs when the activity level exceeds 11,000 units.
Requirement:
What is the total cost at an activity level of 10,000 units?