Woodworks Inc produces cabinet doors. Manufacturing overhead costs tend to fluctuate from one month to the next

High-Low, Scattergraph, and Regression Analysis; Manufacturing Company. Woodworks, Inc., produces cabinet doors. Manufacturing overhead costs tend to fluctuate from one month to the next, and management would like to accurately estimate these costs for planning and decision-making purposes.
The accounting staff at Woodworks recommends that costs be broken down into fixed and variable components. Because the production process is highly automated, most of the manufacturing overhead costs are related to machinery and equipment. The accounting staff believes the best starting point is to review historical data for costs and machine hours:

	Reporting Period (Month)	Machine Hours	Total Costs
	January	1,550	278,000
	February	1,570	280,000
	March	1,115	266,000
	April	1,700	290,000
	May	1,110	262,000
	June	1,225	269,000
	July	1,335	275,000
	August	1,660	286,000
	September	1,000	250,000
	October	1,020	253,000
	November	1,025	260,000
	December	1,600	281,000

Required:
1. Use the high-low method to estimate total fixed costs per month and the variable cost per machine hour. State your results in the cost equation form Y = f + vX by filling in the dollar amounts for f and v. [Hint: Watch the video lecture on “mixed cost calculations” before you attempt this problem.]

High Low	Y = f + vX				Unlocked work area
	High	Low	Difference	Slope
Total Costs
Machine Hours

	Y =	f +	v *	X

	** Solve for f

	Y =	f +	v *	X
	Y			X
	** Solve for Y

2. Use the regression slope / intercept formulas to develop the cost equation Y = f + vX. [Hint: Watch the video lecture on “mixed cost calculations” before you attempt this problem.]

	Regression Analysis

	Slope

	Intercept


	Y =	f +	v *	X
	Y			X
	** Solve for Y

3. Use the results of the high-low method and regression analysis to estimate costs for 1,500 machine hours. (You will have two different answers—one for each method.) Which approach do you think is most accurate and why?

	High – Low
	Y =	f +	v *	X
	Y
	Y

	** Solve for Y

	Regression
	Y =	f +	v *	X
	Y
	Y

	** Solve for Y

Which approach do you think is most accurate and why?

4. Management likes the regression analysis approach and asks you to estimate costs for 5,000 machine hours using this approach (the company plans to expand by opening another facility and hiring additional employees). Calculate your estimate, and explain why your estimate might be misleading.

	Y =	f +	v *	X
	Y
	Y

	** Solve for Y

Explain why your estimate might be misleading.

Leave a Reply Cancel reply