Question

Bricol Confectionary manufactures candied treats for hotels in a highly automated assembly plant in Edmonton, Alberta. Their 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: Observation Machine-hours Kilowatt-hours Total Overhead Costs January 1,880 2,260,000 $116,000 February 1,825 2,170,000 114,000 March 1,900 2,250,000 115,000 April 1,650 2,145,000 114,000 May 1,625 2,100,000 105,000 June 1,500 2,060,000 100,000

Required (5 marks)

a) Using the high-low method, determine the cost estimating equation with machine-hours as the predictor variable. (2 marks)

b) Using the high-low method, determine the cost estimating equation with kilowatt-hours as the predictor variable. (2 marks)

c) For July the company ran the machines for 1,600 hours and used 2,075,000 kilowatt hours of power. The overhead costs totaled $95,000. Which driver was the best predictor for July? Explain why you chose the predictor you did. (2 marks)

Answer 1

Months	Machine Hours	Killowat Hours	Overhead Costs
January	1,880	2,260,000	$                        116,000
February	1,825	2,170,000	$                        114,000
March	1,900	2,250,000	$                        115,000
April	1,650	2,145,000	$                        114,000
May	1,625	2,100,000	$                        105,000
June	1,500	2,060,000	$                        100,000
Part a-Prediction on the basis of Machine Hours
	Machine Hours	Overhead cost
High level of activity	1,900	$115,000
Low level of activity	1,500	$100,000
Change	400	$15,000
Variable Overhead Cost per machine hrs =$15,000 / 400 hours =$37.50 per machine hours
Fixed cost element =$115,000 - (1,900*$37.50)
Fixed cost element =$43,750
Cost equation is:Y =$43,750+$37.50X
Part b-Prediction on the basis of Killowatt Hours
	Killowatt Hours	Overhead cost
High level of activity	2,260,000	$116,000
Low level of activity	2,060,000	$100,000
Change	200,000	$16,000
Variable Overhead Cost per machine hrs =$16,000 / 200,000 hours =$0.08 per killowatt hours
Fixed cost element =$116,000 - (2,260,000*$0.08)
Fixed cost element =($64,800)
Cost equation is:Y = -$64,800+$0.08X
Part c
Estimated Overhead Cost as per Machine hours equation =$43,750+($37.50*1600) =$103,750
Estimated Overhead Cost as per Killowatt hours equation = -$64,800+($0.08*2,075,000) =$101,200
Since the Estimated Overhead Cost as per Killowatt hours equation is closer to the actual Overhead cost incurred.
Hence the Killowatt hours is the best predictor for July