A manufacturing manager collected the following information for the Production Department:
A manufacturing manager collected the following information for the Production Department:
| Observation | Machine hours | Total Operating Costs |
|---|---|---|
| January | 8,000 | $60,000 |
| February | 9,200 | 66,000 |
| March | 7,600 | 61,000 |
| April | 8,800 | 64,000 |
| May | 9,000 | 65,000 |
Required:
a. Determine the estimating cost function with machine-hours as the cost driver using the high-low method.
b. If June's estimated machine-hours total 8,400, what is the estimated cost of the Production Department?
Homework Answers
| a | Total cost incurred | |||
| Machine hours | Costs incurred | |||
| High level of activity | 9,200 | $66,000 | ||
| Low level of activity | 7,600 | $60,000 | ||
| Change | 1,600 | $6,000 | ||
| Variable maintainance cost per machine hours =$6,000 / 1,600 =$3.75 per machine hours | ||||
| Fixed cost element =$66,000 - (9,200*$3.75) | ||||
| Fixed cost element =$66,000 - $34,500 =$31,500 | ||||
| b | Estimated Total cost at 8,400 hours =$31,500 + (8,400 hours*$3.75) | |||
| Estimated Total cost at 8,400 hours =$31,500 + 31,500 =$63,000 | ||||
(a)
Slope coefficient= (Cost at highest activity – cost at lowest activity)/(Highest activity - Lowest activity)
($66000 - $61000)/(9200 - 7600)
= $3.125 per machine-hour
Constant = $66000 - ($3.125 × 9200) = $37250
Machine-hour estimating equation = $37250 + $3.125X
(b) Estimated machine hours = 8400
Estimated cost = $37250 + $3.125X
= $37250 + ($3.125 * 8400) = $63500
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