Question

McKnight Industries is in the process of analyzing its manufacturing overhead costs. McKnight Industries is not sure if the number of units produced or number of direct labour hours is the best cost driver to use for predicting manufacturing overhead costs.

1. Use Excel regression analysis to determine Mcknight Industries' manufacturing overhead cost equation using DL hours as the cost driver. Comment on the R-square. Estimate MOH costs if Mcknight Industries incurs 26,100 DL hours in January 2. Use Excel regression analysis to determine McKnight's MOH cost equation using number of units produced as the cost driver. Use all of the data provided. Project total MOH costs if McKnight Industries produces 5,000 units. Which cost equation is better this one or the one from Question 17 Why? 3. Use Excel regression analysis to determine McKnight Industries' MOH cost equation using number of units produced as the cost driver. This time, remove any potential outliers before performing the regression. How does this affect the R-square? Project total MOH costs if 5,000 units are produced 4. In which cost equation do you have the most confidence? Why?

Answer 1

SOLUTION:

Req. 1
Carmichael’s manufacturing overhead appears to be a mixed cost. If it were a fixed cost, it would remain constant each month. If it were a variable cost, it would remain constant on a per unit (of activity) basis. Both MOH per DL hour and MOH per unit produced vary with volume. As in this company’s case, manufacturing overhead usually includes both fixed and variable components.

Req. 2

Relationship of Hospital Overhead Costs to Nursing Hours S585,000 Hospital Overhead Costs $390,000+ 16,000 34,600 Nursing Hours

Req. 3

Relationship of Hospital Overhead Costs to Number of Patient Days $585,000 Hospital Overhead Costs $390,000+ 3,100 Number of Patient Days 5,900

Req. 4
There does not appear to be any outlier in the graph depicting MOH costs vs. DL hours. In the graph of MOH costs vs. units, there does appear to be an outlier. The September data point appears out of line with the other data points. If any of the data points are out of line, management should check into this data before continuing with the analysis.

Req. 5
       Cost   Activity  
Variable cost:   High pt.   $562,000   30,000   Nov
   Low pt.   $435,000   20,000   Sep
   Difference   $1,27,000   10,000  

Change in cost / change in volume = variable cost
$127,000 / 10,000 = $12.7

Using high point
   Total cost   =   Variable cost component + fixed cost component
   y   =   vx + f
   $562,000   =   30,000 ($12.7) + f
   $562,000   =   $381000 + f
   $181000   =   f
   Total fixed costs = $181000

y = $12.7x + $181000

R6
January’s estimated manufacturing overhead costs are $495,125.
y = vx + f
y = 26,100 ($12.7) + $181000
y = $512470