MA4 Problem: Cost Classification & Behavior – Vettor Company

MA4 Problem: Cost Classification & Behavior – Vettor Company

 The Vettor Company manufactures electrical components. Plant management has experienced difficultieswith fluctuating monthly overhead costs. Management wants to be able to estimate overhead costs to planits operations and its financial needs. A trade association publication reports that for companiesmanufacturing electrical components, overhead tends to vary with machine-hours.Monthly data were gathered on machine-hours and overhead costs for the past two years. There were nomajor changes in operations over this period of time. The raw data are as follows:

 Month Machine- Overhead  Number Hours Costs

1 20,000 $84,0002 25,000 99,0003 22,000 89,5004 23,000 90,0005 20,000 81,5006 19,000 75,5007 14,000 70,5008 10,000 64,5009 12,000 69,00010 17,000 75,00011 16,000 71,50012 19,000 78,00013 21,000 86,00014 24,000 93,00015 23,000 93,00016 22,000 87,00017 20,000 80,00018 18,000 76,50019 12,000 67,50020 13,000 71,00021 15,000 73,50022 17,000 72,50023 15,000 71,00024 18,000 75,000

These data were entered into Excel and a regression was run on the data. The following output wasobtained:R-square 0.91t-value of the Independent Variable 15.00Coefficients of the equation:Intercept 39,859Independent variable (slope) 2.15

Required – 

a. Use the high-low method to estimate the overhead costs. b. Are the regression analysis results acceptable?c. Use the results of both the high-low method and the regression to prepare the cost estimationequation and to prepare a cost estimate for 22,000 machine hours.