Question

	Possibility #1	Possibility #2	Possibility #3	Indirect
	Machine	# of	# of	Mfg Labor
Week	Hours	Batches	DMLH	Costs
1	97.50	21	55.00	$1,475.00
2	57.50	9	47.50	$887.50
3	102.50	18	87.50	$1,645.00
4	117.50	15	37.50	$1,290.00
5	85.00	9	36.25	$940.00
6	60.00	18	47.50	$1,203.75
7	85.00	15	37.50	$1,487.50
8	110.00	19	43.75	$1,513.75
9	77.50	16	45.00	$1,255.00
10	90.00	14	25.00	$1,146.25
11	75.00	13	58.75	$962.50
12	120.00	15	56.25	$1,820.00
Required:
(1) Using the data observations for Possibility #3, derive a cost function using the high-low method.
(2) If Harrington anticipates 31.25 DMLH for Week 13, what are their expected indirect manufacturing costs
for that week, using the cost function derived in #1?
(3) What is the major disadvantage of the High-Low method?
(4) Using Excel's simple regression, which of the three possible cost drivers is the best choice?
Show the scattergraph, equation, and r² value for all three; justify your choice using the 3 criteria.
(5) If Harrington anticipates 31.25 DMLH hours, 20 batches, and 93.75 machine hours for Week 13, what are
their expected indirect manufacturing labor costs for that week, using the cost function from your
BEST choice in #4?

Answer 1

A	B	C	D	E	F	G	H
2
3
4			Possibility #1	Possibility #2	Possibility #3	Indirect
5			Machine	# of	# of	Mfg Labor
6		Week	Hours	Batches	DMLH	Costs
7		1	97.5	21	55	$1,475.00
8		2	57.5	9	47.5	$887.50
9		3	102.5	18	87.5	$1,645.00
10		4	117.5	15	37.5	$1,290.00
11		5	85	9	36.25	$940.00
12		6	60	18	47.5	$1,203.75
13		7	85	15	37.5	$1,487.50
14		8	110	19	43.75	$1,513.75
15		9	77.5	16	45	$1,255.00
16		10	90	14	25	$1,146.25
17		11	75	13	58.75	$962.50
18		12	120	15	56.25	$1,820.00
19
20		1)
21
22		In high-low method the cost for highest and lowest level of activity is used to predict cost at a particular activity level.
23		Using DMLH as activity, indirect mfg labor cost can be calculated as follows:
24
25			DMLH	Indirect Labor Cost
26		Min	25.00	$1,146
27		Max	87.50	$1,645
28
29		Variable cost	=(change in cost)/(change in labor hours)	7.98	=(E27-E26)/(D27-D26)
30		Fixed Cost		$946.75	=E26-D26*E29
31
32		Thus the cost equation will be as follows:
33		Indirect Labor cost = $946.75 + 7.98*DMLH
34
35		2)
36
37		DMLH	31.25
38
39		Indirect labor cost can be calculated as follows:
40		Indirect Labor cost	= $946.75 + 7.98*DMLH
41			$236,095.78	=E30*E29*D37
42
43		Thus indirect labor cost using high low method is	$236,095.78
44
45		3)
46
47		High low method uses costs at highest and lowest level of activity.
48		In the case of exceptionally low and high activity level may lead to
49		incorrect estimation of costs at normal level.
50