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Mini-Video - Accounting 2 - Chapter 21 "The High-Low Method" - YouTube
Channel: JCCCvideo
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Now, once we determine once we determine,
folks, that there is a relationship between
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two variables, we still want to come up with
the equation of that line, the Y equals A
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plus B times X.
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One way that we can do that, kind of a quick
and dirty little way, is what is known as
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the highlow method.
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And the objective, again, is to calculate
the equation of the mixed cost.
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That Y equals A plus B times X, okay?
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Now I've learned that the best way to teach
highlow method is actually just to do an example.
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So we're going to do an example here.
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All right?
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Okay, here is a series of months and the units
produced and the total cost for each.
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And let's say we feel that these, this is
a situation that is a mixed cost.
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And we did that, perhaps, by plotting out
a scatter diagram.
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Okay, the first thing that we want to do here
is identify which of these columns is the
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X variable and which one of these is the Y
variable.
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Okay, well which is the X variable?
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Units produced.
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Okay.
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And total cost is the Y variable, okay?
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Now what we do, come off that if you would
and show me, is once we've identified the
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X and the Y there we go, show it all if you
can.
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Then what we want to do, actually, is we kind
of want to cover up the Y's, don't even look
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at them.
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Just look at your X's.
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And I want you to determine which of these
is the highest X and which of these is the
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lowest X.
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I'm not asking you which is the highest Y
and lowest Y no, no, no.
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Cover up the Y's so you're not even tempted
to look at them right now.
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Which of these of these is the highest X?
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Which of these is the lowest X?
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Okay.
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So going back to the computer, once you do
that, which is the highest X?
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>>February.
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>>February, okay?
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That's the high.
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Which of these is the lowest X?
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>>June.
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>>June.
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That is the low.
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You with me?
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Okay.
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So, what we're going to do then, once we've
determined the high month and the low month,
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we're going to actually use all the data from
those months now, and we are going to figure
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out the equation of the mixed cost, okay?
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The first thing that we're going to do is
we're going to determine the variable cost,
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okay?
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So let me go back over the document camera,
all right?
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Okay.
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The first thing we're going to solve for is
B, which is the variable cost.
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Well that equals the change in Y over the
change in X of the high and the low point,
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okay?
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So the change in Y is is it 29,000 minus 20,500?
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Somebody help me oops, I just wrote on that.
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>>That's right.
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>>Okay.
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Divided by the change in X of the high and
the low point.
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So that would be 67,500 units minus 17,500
units; is that correct?
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>>Yup.
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>>So if you compute that out, that comes out
to 17 cents a unit.
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That is the B in our line.
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Are you with me?
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Okay.
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Now the next step is we want to solve for
A, which is our fixed cost.
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The way we're going to do that is we're going
to, once again, consider the entire equation
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of a mixed cost.
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We just solved for B, okay?
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Now what we're going to do is we're going
to borrow the Y and the X from either the
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high or the low point, okay?
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From the high or the low point.
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So going back to the computer, we're going
to use either this X and Y up here or this
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one down here.
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Either way it'll give us the same answer.
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I usually use the low one because it seems
like it's sometimes easier math, okay?
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So what is the Y what is Y at the low point?
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>>20,500.
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>>20,500.
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A is what we're trying to solve for.
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What is X at the low?
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>>17,500.
>>17,500; is that correct?
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Okay.
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So once you do that you get 20,500 equals
A plus let's see what .17 times 17,500 equals.
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I think that's 2,975.
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>>I can barely see it.
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>>Thank you.
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So 20,500 equals A plus 2,975.
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So what does A equal?
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17,525?
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Okay.
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So we now have our B and we now have our A,
okay?
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Now let me show you how I don't like you to
show this answer.
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Some students will write this out, they'll
say Y equals 17,525 plus .17X.
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Well, yeah, sort of.
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But let's go ahead and define these variables
for this specific situation.
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What does Y, in this situation, equal?
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We're looking back at the computer, Y equals
total costs, right?
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So let's say total costs equals $17,525 plus
– well, what does X equal in this example?
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Units produced, right?
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So let's say 17 cents per unit produced times
the number of units produced.
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Now, doesn't that just give you a better warm
fuzzy in your tummy that you really understand
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what this what we really did was?
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Okay.
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Because now what can we do?
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Well, now what we can do is once we have that
equation right there, let's say we expect
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an activity level of 20,000 units.
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Well, what would we expect to be our total
costs?
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Well, we can plug it into that equation and
we can come up with an answer of 20,925.
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Are you with me?
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Okay, that's why we want that equation.
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So as managers (inaudible) costs.
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(Inaudible) costs is a huge part of running
a business.
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Are you with me?
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