Question

Waverley Welding Company provides welding services for a variety of industrial customers in the manufacturing, aerospace, and electronics industries. The number of jobs completed from one month to the next varies considerably, and jobs differ in terms of the complexity of the welding requirements. More complex jobs can take significantly longer to complete. Management knows that overhead costs have a fixed and a variable component but, until now, has not attempted to determine which measure of activity should be used for planning and forecasting.

The table below shows data for the most recent fiscal year. Management believes that either the number of jobs completed each month or the number of direct labour-hours incurred each month could be used as the activity base. However, they are not sure which is more appropriate:

Month	Overhead		Direct Labour- Hours	Jobs
January	$	75,345	5,081	500
February	$	69,791	3,848	350
March	$	72,293	4,290	400
April	$	81,517	5,766	550
May	$	57,582	2,214	200
June	$	68,664	3,457	250
July	$	78,651	5,300	500
August	$	81,882	6,714	600
September	$	77,991	5,408	500
October	$	68,655	3,924	350
November	$	70,186	4,200	400
December	$	83,734	6,000	510

Overhead includes costs such as the maintenance supervisor’s salary, depreciation on the welding equipment, and indirect materials used on each job. Electricity costs are also included in overhead and are significant since welding equipment consumes a relatively high amount of energy. Waverley Welding also employs a mix of experienced and inexperienced welders. Experienced welders are paid a higher hourly wage but are more efficient and tend to incur less wastage of indirect materials. Inexperienced welders are of course paid less on a per hour basis but work more slowly and use more indirect materials.

Y= ___+____x

Answer 1

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Waverly Welding
	High Low method
Variable cost=	(Highest activity cost- Lowest activity cost)/ (Highest activity units- Lowest activity units)
Highest activity is in August. Labor hours is 6714 which is highest among all other months. Overhead cost in August is 81,882.
Lowest activity is in May. Labor hours is 2214 which is lowest among all other months. Overhead cost in May is 57,582.
	Overhead	Direct Labor hours
Highest activity	81,882.00	6,714.00
Lowest activity	57,582.00	2,214.00
Difference	24,300.00	4,500.00
Variable cost per unit	5.40
Fixed cost	Highest activity cost- (Highest units * Variable cost per unit)
Fixed cost	81,882-(6,714*5.40)
Fixed cost	45,626.00
So overhead cost equation is
Y= 45,626+ 5.40X