Question

6. Ali Papa produces toy robot dogs in a highly automated assembly plant in Semenyih. The automated system is in its first year of operation and management is still unsure of the best way to estimate the overhead costs of operations for budgetary purposes. For the first six months of operations, the following data were collected: Machine-hours Kilowatt-hours Total Overhead Costs (RM) January 3,800 4,520,000 338,000 February 3,650 4,340,000 336,800 March 3,900 4,500,000 339,200 April 3,3001 4,290,000 336,800 May 3,250 4,200,000 326,000 June 3,100 4,120,000 320,000 Required:

Answer 1

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a) Jan ALI PAPA Determination of Cost function with Machine Hrs using High Low Method Month Machine Hrs Cost 3800.00 338000 Feb 3650.00 336800 March 3900.00 339200 Highest Apr 3300.000 336800 May 3250.00 326000 June 3100.00 320000 Lowest Highest Level of Activity Lowest Level of Activity 3900 3100 First we have to calculate Variable Cost Variable cost per Mile (y2 - y1)/(x2-x1) Here (339200-320000) / (3900-3100) 24 Total Cost at highest Level of Activity Total Cost at Lowest Level of Activity Highest level of Activity Lowest Level of Activity Now by putting value of variable cost at either highest or lowest activity level we can get fixeed ccost Fixed Cost Total cost - Total variable cost Putting value for March (highest) 339200-(3900*24) 245600 or June (Lowest) 320000 - (3100*24) 245600 Cost Function (Y) 245600+ 24*X Here, X = Level of Machine Hrs b) Determination of Cost function with Killowat Hrs Hrs using High Low Method Month KW Hrs Cost Jan 4520000.00 338000 Highest Feb 4340000.00 336800 March 4500000.00 339200 Highest Level of Activity Apr 4290000.00 336800 Lowest Level of Activity 4200000.00 326000 June 4120000.00 320000 Lowest 4520000 4120000 May First we have to calculate Variable Cost Variable cost per Mile (y2 - y1)/(x2-x1) Here Total Cost at highest Level of Activity Total Cost at Lowest Level of Activity Highest Level of Activity Lowest Level of Activity (338000-320000) / (4520000-4120000) 0.0450 Now by putting value of variable cost at either highest or lowest activity level we can get fixeed ccost Fixed Cost Total cost - Total variable cost Putting value for Jan (highest) 338000 -(4520000*.045) 134600 or June (Lowest) 320000 -(4120000*.045) 134600 Cost Function (Y) 134600+ .045* X H ere, X = Level of kW Hrs July's estimated cost With Machine Hrs 245600+ (24*3000) 317600 With KW Hrs 134600+ 0.045*4000000) 314600 Estimated cost using KW hrs function is nearer to actual cost than using Machine Hrs. Hence, KW hrs is best estimator for July. d) Six Steps for estrimation of cost function using quantitative approach 1) - Selecting the dependent variable or cost which depends on the cost function to be estimated 2) - choosing the cost driver - identify the factor which is used to estimate the depoendent variable 3)- Collection of data - Collecting the data for various level of activity 4) - Plotting the Data - Representing the data in a graph 5) - Estimating cost fundtion - estimating the cost function by using any method like High Low Method 6) - Evaluating the cost funciton - The cost function estimated in step 5 is evaluated to check it's efficiency and usefullness