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Through the generally accepted accounting principles (GAAP), the Financial Accounting Standards Board (FASB) aims to ensure that financial statements are _____.
a. relevant, reliable, consistent, and comparable
b. circumstantial, inferential, presumptive, and provisional
c. comprehensive, exhaustive, extensive, and independent
d. cursory, intensive, unabridged, and superficial
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The first step is to choose the data points pertaining to the highest and lowest activity levels. In this case, the high level of activity was in June at 850 hours of maintenance and the low level of activity is in February with 450 hours of maintenance. Notice that this method relies upon two data points to estimate the fixed and variable portions of a mixed cost, as opposed to one data point with the scattergraph method.
The second step is to determine the total costs associated with the two chosen points. We incurred costs of $9,800 at the high level of activity and $7,400 at the low level of activity.
The third step is to calculate the change in cost between the two data points. The change in maintenance hours was 400 hours and the change in maintenance dollars was $2,400. Notice, this method relies upon two data points to estimate the fixed and variable portions of a mixed costs, as opposed to one data point with the scattergraph method.
For this example, we divide $2,400 by 400 and determine that the variable cost per hour of maintenance is $6.00.
-- Work on examples to get a good grasp of the formula.