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Cost Formula Using the High Low Method

The controller of Chittenango Chain Company believes that the identification of the variable and fixed components of the firm's costs will enable the firm to make better planning and control decisions. Among the costs the controller is concerned about is the behavior of indirect-materials cost. She believes there is a correlation between machine hours and the amount of indirect materials used.
A member of the controller's staff has suggested that least-squares regression be used to determine the cost behavior of indirect materials. The regression equation shown below was developed from 40 pairs of observations.

S = $200 + $4H
Where S = Total monthly cost of indirect materials
H = Machine hours per month

2. Calculate the estimated cost of indirect materials if 900 machine hours are to be used during a month. (Omit the "$" sign in your response.)

4. The high and low activity levels during the past four years, as measured by machine hours, occurred during April and August, respectively. Data concerning machine hours and indirect-material usage follow.

April ; August
Machine hours 1,100 ; 800
Indirect supplies:
Beginning inventory $ 1,200 ; $ 950
Ending inventory 1,550 ; 2,900
Purchases 6,000 ; 6,100
Determine the cost of indirect materials used during April and August.

5. Use the high-low method to estimate the behavior of the company's indirect-material cost.

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Solution Summary

This solution illustrates how to determine the cost formula for overhead using the High-Low Method and how to apply that cost formula to find the overhead at a given production level.