Question

2-21 High-low method; cost estimation (CMA adapted) (LO 2) Angie March owns a catering company that stages banquets and parties for both individuals and compa- nies. The business is seasonal, with heavy demand during the summer months and year-end holidays and light demand at other times. Angie has gathered the following cost information from the past year: Labor Hours 3,500 2,800 3,000 4,200 4,500 Month January February March April May June July August September October November December Total 5,500 6,500 7,500 7,800 4,500 3,100 6,500 59,400 Overhead Costs $ 62,000 59,000 60,000 64,000 67,000 71,000 74,000 77,000 80,000 68,000 62,000 73,000 $817,000 Required a. Using the high-low method, compute the overhead cost per labor hour and the fixed overhead cost per month. b. Angie has booked 3,200 labor hours for the coming month. How much overhead should she expect to incur? c. If Angie books one more catering job for the month, requiring 200 labor hours, how much additional overhead should she expect to incur? d. Angie recently attended a meeting of the local Chamber of Commerce, at which she heard an accounting professor discuss regression analysis and its business applications.

Answer 1

1. Computation of overhead cost per labor hour and the fixed overhead cost per month using the high low method.

Variable Cost

HAC - LAC Variable Cost Per Unit = HAU – LAU $80,000 - $59.000 7,800 - 2, 800 = $4.2 per labor hour

Here,

HAC is Highest activity cost

LAC is Lowest activity cost

HAU is Highest activity unit corresponding to highest activity cost

LAU is Lowest activity unit corresponding to lowest activity cost

Fixed Cost

Fixed Cost = Total Cost – Variable Cost = $80,000 – (7800 x 4.2) = $47, 240

2. Computation of expected overhead to be incurred.

Particular	Calculation	Amount($)
Variable Cost	3,200 X 4.2	13,440
Fixed Cost		47,240
Total Overhead		60,680

3. Computation of additional overhead expected to be incurred

Additional Overhead = Additional Labor Hour > Overhead Rate = 200 labor hour x 4.2 = $840

4.Regression analysis is helpful in business to forcast the data. It helps the management to forcast that how many products could be sold in particular future period and then the managers will work accordingly.