The management of Wheeler Company has decided to develop cost formulas for its major overhead activities. Wheeler uses a highly automated manufacturing process, and power costs are a significant manufacturing cost. Cost analysts have decided that power costs are mixed; thus, they must be broken into their fixed and variable elements so that the cost behavior of the power usage activity can be properly described. Machine hours have been selected as the activity driver for power costs. The following data for the past eight quarters have been collected: Quarter Machine Hours Power Cost
1 20,000 $26,000
2 25,000 $38,000
3 30,000 $42,500
4 22,000 $37,000
5 21,000 $34,000
6 18,000 $29,000
7 24,000 $36,000
8 28,000 $40,000

Using the high and low points (i. e., the high-low method), compute a power cost formula. (Note: Round variable rate to three decimal places.)

Total power cost = $ + ( $ x Number of machine hours )

Total power cost= 1,250 + 1.375 * number of machine hours

Explanation:

Giving the following information:

Quarter Machine Hours Power Cost

1 20,000 $26,000

2 25,000 $38,000

3 30,000 $42,500

4 22,000 $37,000

5 21,000 $34,000

6 18,000 $29,000

7 24,000 $36,000

8 28,000 $40,000

To calculate the variable and fixed costs, 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= (42,500 - 26,000) - (30,000 - 18,000)

Variable cost per unit= $1.375

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

Fixed costs= 42,500 - (1.375*30,000)

Fixed costs= 1,250

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

Fixed costs= 26,000 - (1.375*18,000)

Fixed costs= 1,250

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