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CA Intermediate · Cost and Management Accounting · Introduction to Cost and Management Accounting

Ganga Foods Ltd. has a plant where the electricity bill consists of a fixed monthly charge plus a rate per unit consumed. In a month with 8,000 machine hours the bill was Rs 1,90,000, and in a month with 12,000 machine hours it was Rs 2,50,000. Using the high-low method, what is the estimated electricity cost for a month with 10,000 machine hours?

The estimated cost is Rs 2,20,000. The variable rate is Rs 60,000 divided by 4,000 hours, which is Rs 15 per hour, and fixed cost is Rs 70,000. At 10,000 hours, variable cost of Rs 1,50,000 plus fixed cost of Rs 70,000 gives Rs 2,20,000.

  1. ARs 2,10,000
  2. BRs 2,20,000Correct
  3. CRs 2,30,000
  4. DRs 2,25,000

Explanation

Variable rate = (2,50,000 - 1,90,000) / (12,000 - 8,000) = 60,000 / 4,000 = Rs 15 per hour. Fixed cost = 1,90,000 - 8,000 x 15 = Rs 70,000. At 10,000 hours: 70,000 + 1,50,000 = Rs 2,20,000. Check at 12,000 hours: 70,000 + 1,80,000 = 2,50,000. Rs 2,30,000 is wrong because it adds the fixed cost on top of a figure that already includes it in the wrong way.

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