# Overhead Costing High-Low Method

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Managers in the Stamping Department have been studying overhead cost and its relationship with machine hours. Data from the most recent 12 months follows.

Month Overhead Machine Hours

January $5,030 2,730

February 1,600 600

March 7,210 3,403

April 4,560 2,200

May 6,880 3,411

June 6,520 2,586

July 6,230 3,364

August 5,570 2,411

September 7,728 3,960

October 5,810 2,897

November 4,580 2,207

December 6,010 2,864

The manager of the department has requested a regression analysis of these two variables(labeled no.1 below) However, the staff person performing the analysis decided to run another regression that excluded February (labeled No. 2) She observed that the volume of activity was very low for that month because of two factors: a severe flu outbreak and an electrical fire that disrupted operations for about 10 working days.

Regression No. 1

Constant 428.00

R2 0.79

b coefficient 1.86

Regression No. 2

Constant 550.00

R2 0.74

b coefficient 1.90

A. Prepare an overhead cost breakdown by using the high-low method. The analysis should be useful in helping predict variable and fixed costs under normal operating conditions.

B. Prepare an estimate of overhead cost for a volume of 3,000 machine hours by using Regression No. 1.

C. You now have the ability to analyze three cost estimates from the high-low data in part(A) and the two regression equations. Which one do you feel would provide the best estimate? Explain the factors that support your choice. NOTE: DO NOT calculate an overhead cost estimate with regression No. 2.

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##### Solution Summary

The solution is presented on an excel spreadsheet and prepares an overhead cost breakdown and analyzes the two regressions.

##### Solution Preview

Month Overhead Machine Hrs

Jan $5,030.00 2730

Feb $1,600.00 600

Mar $7,210.00 3403

Apr $4,560.00 2200

May $6,880.00 3411

Jun $6,520.00 2586

Jul $6,230.00 3364

Aug $5,570.00 2411

Sep ...

###### Education

- BE, Bangalore University, India
- MS, University of Wisconsin-Madison

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