Question

The McGraw Company is accumulating data to be used in preparing its annual profit plan for the coming year. The cost behavior pattern of the maintenance costs must be determined. The accounting staff has suggested that linear regression be employed to derive an equation in the form of y = a + bx for maintenance costs. Data regarding the maintenance hours and costs for last year and the results of the regression analysis are as follows: (CMA adapted)

	Hours of Activity				Maintenance Costs
January		480			$	4,200
February		320				3,000
March		400				3,600
April		300				2,820
May		500				4,350
June		310				2,960
July		320				3,030
August		520				4,470
September		490				4,260
October		470				4,050
November		350				3,300
December		340				3,160
Sum		4,800			$	43,200
Average		400				3,600
A coefficient						684.65
B coefficient						7.2884
Standard error of the a coefficient		49.515
Standard error of the b coefficient		0.12126
Standard error of the estimate						34.469
R2						0.99724
T-value a						13.827
T-value b						60.105

Using the high-low method to estimate cost behavior, 420 maintenance hours in a month would mean the maintenance costs would be budgeted at:

• $3,600.

• $3,150.

• $3,780.

• $3,720.

Answer 1

Variable cost per unit = (Highest activity cost - Lowest activity cost)/(Highest activity - Lowest activity)

= (4,470-2,820)/(520-300)

= 1,650/220

= 7.5 per hour

Fixed cost = Highest activity cost - Highest activity x Variable cost per hour

= 4,470 - 520 x 7.5

= 4,470 - 3,900

= $570

estimate cost behavior, 420 maintenance hours in a month would mean the maintenance costs would be budgeted at=

= Fixed cost + Variable cost per hour x Activity hour

= 570 + 7.5 x 420

= 570+3,150

= $3,720

Fourth option is correct option.

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