Luisa Crimini has been operating a beauty shop in a college town for the past 10 years. Recently, Luisa rented space next to her shop and opened a tanning salon. She anticipated that the costs for the tanning service would primarily be fixed, but found that tanning salon costs increased witch the number of appointments. Costs for this service over the past 8 months are as follows: Month Tanning Appointments Total Cost January February 1,600 $1,754 2,000 2,140 March 3.500 2,790 2,400 Аpril Мay June 2,500 1,500 1,790 2300 2,275 July August 2,150 2,200 3,000 2,640
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Refer to the information for Luisa Crimini above.
Required:
1. Which month represents the high point? The low point?
2. Using the high-low method, compute the variable rate for tanning. Compute the fixed
cost per month.
3. Using your answers to Requirement 2, write the cost formula for tanning services.
4. Calculate the total predicted cost of tanning services for September for 2,500 appointments using the formula found in Requirement 3. Of that total cost, how much is the
total fixed cost for September? How much is the total predicted variable cost for
September?
5. CONCEPTUAL CONNECTION Identify and briefly explain any additional issues that
Luisa might be wise to consider when using the high-low method to estimate the costs of
her tanning salon.
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