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# Accounting: Cost estimation with high-low method.

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Ken Howard, financial analyst at JVR Corporation, is examining the behavior of quarterly maintenance costs for budgeting purposes. Howard collects the following data on machine-hours worked and maintenance costs for the past 12 quarters:

Quarter Machine-Hours Maintenance Costs
1 - 90,000 \$185,000
2 - 110,000 \$220,000
3 - 100,000 \$200,000
4 - 120,000 \$240,000
5 - 85,000 \$170,000
6 - 105,000 \$215,000
7 - 95,000 \$195,000
8 - 115,000 \$235,000
9 - 95,000 \$190,000
10 - 115,000 \$225,000
11 - 105,000 \$180,000
12 - 125,000 \$250,000

1. Estimate the cost function for the quarterly data using the high-low method.
2. Plot and comment on the estimated cost function.
3. Howard anticipates that JVR will operate machines for 90,000 hours in quarter 13. Calculate the predicted maintenance costs in quarter 13 using the cost function estimated in #1.

* Complete in Excel

#### Solution Summary

The problem deals with estimating costs using the high-low method.

\$2.19

## Managerial Accounting (ABC Company)

ABC Company's total overhead costs at various levels of activity are presented below:

March 60,000 \$216,800
April 50,000 \$194,000
May 70,000 \$239,600
June 80,000 \$262,400

Assume that the overhead costs above consist of utilities, supervisory salaries, and maintenance. At the 50,000 machine-hour level of activity these costs are:

Utilities (V) \$ 54,000
Supervisory salaries (F) 62,000
Maintenance (M) 78,000

V = Variable; F = Fixed; M = Mixed

The company wants to break down the maintenance cost into its basic variable and fixed cost elements.

Required:

a. Estimate the maintenance cost for June.

b. Use the high-low method to estimate the cost formula for maintenance cost.

c. Estimate the TOTAL overhead cost at an activity level of 55,000 machine hours. (Note that Part C is asking about total overhead cost and not just maintenance cost)