Methods of estimating costs

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Methods of Estimating Costs: High-Low

Adriana Corporation manufactures football equipment. In planning for next year, the managers want to understand the relation between activity and overhead costs. Discussions with the plant supervisor suggest that overhead seems to vary with labor-hours, machine-hours, or both. The following data were collected from last year's operations:

Month

Labor-Hours

Machine-Hours

Overhead Costs

1

3,625

6,775

$513,435

2

3,575

7,035

518,960

3

3,400

7,600

549,575

4

3,700

7,265

541,400

5

3,900

7,955

581,145

6

3,775

7,895

572,320

7

3,700

6,950

535,110

8

3,625

6,530

510,470

9

3,550

7,270

532,195

10

3,975

7,725

565,335

11

3,375

6,490

503,775

12

3,550

8,020

564,210

Required

a. Use the high-low method to estimate the fixed and variable portions of overhead costs based on machine-hours.

b. Managers expect the plant to operate at a monthly average of 7,500 machine-hours next year. What are the estimated monthly overhead costs, assuming no inflation?

Reference no: EM13545568

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