their third year The I dont want to run regression Corp has

their third year The I don\'t want to run regression Corp\" has the following data that has been compiled in ofoperation relative to Machine Hours and Overhead compled data on labor hours compared to overhead, the sense of their top cost estimator is that there is a stronger correlation between machine hours to overhead VS labor hours to overhead since the company is very capital intensive and a large part of their overhead is driven by maintenance on the tooling. In fact she ran a regression analysis and it show the R squared to be rather kower in explaining overhead to labor hours. While she would like the company to do their estimates using regression, she has found Shat few of the accountants and even fewer of the ine general managers actually understand the math and while she tried, she was denied the funding to create a company wide estimating tool that simply required input of numbers. Accordingly after studyling half of the comparies 30 processes or 0iqurtrerts, she determined that using te N-b method to be 95% as accurate as regression and much easler for the lay person to understand costs for process #1, whle the company has also Based on une data below for the process area # 1 the following data has been compiled Machine Hours Total OH Costs in $ 6000 5800 12000 6900 6100 7500 2000 515,000 700,000 531,000 90,000 470,000 551,000 533,000 561,000 518,000 7200 6100 7250 5900 7900 10 12 A As the cost analyst staring at the data, what is the first thing you would probably want to adjust for before you perform a high-lo analysis-2pts B. Using the hi- lo method determine your best estimate of the fixed and variable portions of overhead cost and put the solution into a simple equation.-15 pts C. What is significant about the point made that this data is from year 3 VS say year 1 of operation -2 pts D. The CEO is insisting that the company increase their sales targets so that next year they will run at an average sales and in furn production level of 8000 hours a month, What would be the average total OH costs per month, assuming no inflation. (just for this one process)-6pts Hint: you can use regression but the hi - lo data will be close enough.

Solution

1 according to me there should not be a much longer period to cover and there should not be change in the underlying business conditions, as change in technological machinery involved. 2 As per the high low method: (Cost at highest value of cost driver - cost at lowest value of cost driver) Variable Cost : ----------------------------------------------------------------------------------------- (Highest value of cost driver - lowest value of cost driver) = (700000 - 470000) (12000 - 2000) = $             23.00 per machine hour Fixed Cost : Total cost at lowest cost driver - (lowert cost driver value * variable cost per driver) = $ 470000 - (2000*23) = $ 4,24,000.00 Equation is to be = Total cost is 23H + 424000 3 Year 1 figure can be less reliable as there are many learning issues as compared to year 3 where there involves a business learning. And the equation in year three includes more accurate variable cost per variable. 4 Estimated average total cost at 8000 hours = 23*8000 + 424000 = $ 6,08,000.00