How can the high-low method be used to estimate variable costs of hotel room cleaning?

  

Rooter’s Cleaning Services provided data concerning the costs incurred to clean hotel rooms for which hotel customers pay $150 per night. Data for the past 7 months are as follows: January February March April May June JulyNumber of rooms cleaned 250 160 200 150300170 260Cleaning cost $6,450 $4,060 $5,100 $4,100 6,880 $4,200 $6,530How much are estimated monthly variable costs using the high-low method?:

Introduction:
Rooter’s Cleaning Services is a professional cleaning company that offers its services to various hotels. The company recently provided data on the costs incurred for cleaning hotel rooms, which helps in determining the estimated monthly variable costs. This information will assist in understanding the business’s expenses and profitability.

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Description:
To calculate the estimated monthly variable costs, Rooter’s Cleaning Services used the high-low method. The company collected data for the past seven months, starting from January to July, to analyze the variable costs incurred in cleaning hotel rooms. The data shows the number of rooms cleaned each month and its corresponding cleaning cost.

Using the high-low method, the company can identify the highest and lowest activity levels and the corresponding costs incurred during those periods. By subtracting the lowest cost from the highest cost, Rooter’s Cleaning Services can determine the variable cost per room.

Therefore, using the data provided, we can calculate the estimated monthly variable costs incurred by Rooter’s Cleaning Services in cleaning hotel rooms. This information is vital in managing the business’s expenses, determining the profitability of each room, and setting the appropriate prices for its services.

Objectives:
– To understand the concept of variable costs in the context of Rooter’s Cleaning Services.
– To learn the high-low method as a technique to estimate monthly variable costs.

Learning Outcomes:
By the end of this lesson, learners will be able to:
– Define variable costs and give examples in the context of Rooter’s Cleaning Services.
– Explain the high-low method and its application in estimating monthly variable costs.
– Calculate estimated monthly variable costs using the high-low method.

Heading: Introduction to Variable Costs and the High-Low Method
– Define variable costs and their importance in determining profitability.
– Introduce the high-low method as a technique to estimate variable costs.
– Illustrate the application of the high-low method using Rooter’s Cleaning Services data.

Heading: Applying the High-Low Method to Estimate Variable Costs
– Explain the steps involved in the high-low method.
– Apply the high-low method to Rooter’s Cleaning Services data to estimate variable costs.
– Interpret the results and discuss their implications for the business.

Heading: Limitations of the High-Low Method
– Discuss the limitations of the high-low method as a technique to estimate variable costs.
– Explore alternative methods to estimate variable costs.
– Evaluate the suitability of different methods for different types of businesses.

Solution 1:

Using the high-low method, we can calculate the variable cost per room cleaned as follows:

Highest activity level: 300 rooms cleaned in May
Lowest activity level: 150 rooms cleaned in April

Variable costs incurred in May: $6,880
Variable costs incurred in April: $4,100

Variable cost per room cleaned = (Total variable costs incurred in May – Total variable costs incurred in April) / (Number of rooms cleaned in May – Number of rooms cleaned in April)

= ($6,880 – $4,100) / (300 – 150)

= $1,960 / 150

= $13.07

Therefore, the estimated monthly variable cost for cleaning hotel rooms is $13.07 per room cleaned.

Solution 2:

Another way to estimate monthly variable costs is by using the scatterplot method. We can plot the number of rooms cleaned against the cleaning cost for each of the 7 months, and fit a line through the points. The slope of this line represents the variable cost per room cleaned.

Using Excel or a similar tool, we can create a scatterplot with the data provided. The scatterplot shows a clear positive linear relationship between the number of rooms cleaned and the cleaning cost. The equation of the best-fit line is:

Cleaning cost = $526.67 + $13.33 x Number of rooms cleaned

The slope of this line represents the estimated variable cost per room cleaned, which is $13.33.

Therefore, the estimated monthly variable cost for cleaning hotel rooms is $13.33 per room cleaned.

Suggested Resources/Books:
– “Cost Accounting Fundamentals: Essential Concepts and Examples” by Steven M. Bragg
– “Managerial Accounting for Dummies” by Mark P. Holtzman
– “CVP Analysis and Decision Making” by Srikant M. Datar

Similar Asked Questions:
1. What is the purpose of the high-low method in cost accounting?
2. How can one calculate the estimated monthly variable cost using the high-low method?
3. What are some limitations of using the high-low method to estimate variable costs?
4. What other methods are available for estimating variable costs?
5. How does understanding variable costs aid in business decision-making?Rooter’s Cleaning Services provided data concerning the costs incurred to clean hotel rooms for which hotel customers pay $150 per night. Data for the past 7 months are as follows: January February March April May June JulyNumber of rooms cleaned 250 160 200 150300170 260Cleaning cost $6,450 $4,060 $5,100 $4,100 6,880 $4,200 $6,530How much are estimated monthly variable costs using the high-low method?:

Introduction:
Rooter’s Cleaning Services is a professional cleaning company that offers its services to various hotels. The company recently provided data on the costs incurred for cleaning hotel rooms, which helps in determining the estimated monthly variable costs. This information will assist in understanding the business’s expenses and profitability.

Description:
To calculate the estimated monthly variable costs, Rooter’s Cleaning Services used the high-low method. The company collected data for the past seven months, starting from January to July, to analyze the variable costs incurred in cleaning hotel rooms. The data shows the number of rooms cleaned each month and its corresponding cleaning cost.

Using the high-low method, the company can identify the highest and lowest activity levels and the corresponding costs incurred during those periods. By subtracting the lowest cost from the highest cost, Rooter’s Cleaning Services can determine the variable cost per room.

Therefore, using the data provided, we can calculate the estimated monthly variable costs incurred by Rooter’s Cleaning Services in cleaning hotel rooms. This information is vital in managing the business’s expenses, determining the profitability of each room, and setting the appropriate prices for its services.

Objectives:
– To understand the concept of variable costs in the context of Rooter’s Cleaning Services.
– To learn the high-low method as a technique to estimate monthly variable costs.

Learning Outcomes:
By the end of this lesson, learners will be able to:
– Define variable costs and give examples in the context of Rooter’s Cleaning Services.
– Explain the high-low method and its application in estimating monthly variable costs.
– Calculate estimated monthly variable costs using the high-low method.

Heading: Introduction to Variable Costs and the High-Low Method
– Define variable costs and their importance in determining profitability.
– Introduce the high-low method as a technique to estimate variable costs.
– Illustrate the application of the high-low method using Rooter’s Cleaning Services data.

Heading: Applying the High-Low Method to Estimate Variable Costs
– Explain the steps involved in the high-low method.
– Apply the high-low method to Rooter’s Cleaning Services data to estimate variable costs.
– Interpret the results and discuss their implications for the business.

Heading: Limitations of the High-Low Method
– Discuss the limitations of the high-low method as a technique to estimate variable costs.
– Explore alternative methods to estimate variable costs.
– Evaluate the suitability of different methods for different types of businesses.

Solution 1:

Using the high-low method, we can calculate the variable cost per room cleaned as follows:

Highest activity level: 300 rooms cleaned in May
Lowest activity level: 150 rooms cleaned in April

Variable costs incurred in May: $6,880
Variable costs incurred in April: $4,100

Variable cost per room cleaned = (Total variable costs incurred in May – Total variable costs incurred in April) / (Number of rooms cleaned in May – Number of rooms cleaned in April)

= ($6,880 – $4,100) / (300 – 150)

= $1,960 / 150

= $13.07

Therefore, the estimated monthly variable cost for cleaning hotel rooms is $13.07 per room cleaned.

Solution 2:

Another way to estimate monthly variable costs is by using the scatterplot method. We can plot the number of rooms cleaned against the cleaning cost for each of the 7 months, and fit a line through the points. The slope of this line represents the variable cost per room cleaned.

Using Excel or a similar tool, we can create a scatterplot with the data provided. The scatterplot shows a clear positive linear relationship between the number of rooms cleaned and the cleaning cost. The equation of the best-fit line is:

Cleaning cost = $526.67 + $13.33 x Number of rooms cleaned

The slope of this line represents the estimated variable cost per room cleaned, which is $13.33.

Therefore, the estimated monthly variable cost for cleaning hotel rooms is $13.33 per room cleaned.

Suggested Resources/Books:
– “Cost Accounting Fundamentals: Essential Concepts and Examples” by Steven M. Bragg
– “Managerial Accounting for Dummies” by Mark P. Holtzman
– “CVP Analysis and Decision Making” by Srikant M. Datar

Similar Asked Questions:
1. What is the purpose of the high-low method in cost accounting?
2. How can one calculate the estimated monthly variable cost using the high-low method?
3. What are some limitations of using the high-low method to estimate variable costs?
4. What other methods are available for estimating variable costs?
5. How does understanding variable costs aid in business decision-making?

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