Mickey Toys Company is attempting to determine the behavior of setup costs for its Minneapolis Plant. Two
Question:
Mickey Toys Company is attempting to determine the behavior of setup costs for its Minneapolis Plant. Two possible activity drivers have been mentioned: direct labor hours and number of batches produced. The plant controller has accumulated the following data.
Month Overhead Direct Labor Number of
Cost Hours Batches
Feb. 7,700 2,000 55
Mar. 7,690 2,100 50
April 10,400 3,100 75
May 9,400 2,700 62
June 9,584 2,800 65
July 8,680 2,500 58
Aug. 8,550 2,400 56
Sept. 9,735 2,900 66
Oct. 10,500 3,000 80
Required:
1. Prepare a Scattergraph by plotting Overhead costs (y axis) against Direct Labor Hours (x axis).
a. Fit a line to the data (scatter graph); select any two points and determine the cost equation for Overhead costs.
b. Using a high-low method, compute the cost formula for Overhead with Direct Labor Hours as the activity.
c. Estimate a regression equation with direct labor hours as the activity driver. If the Minneapolis plant forecasts 2,600 direct labor hours for November, what will be the estimated overhead cost?
2. Repeat parts a, b, and c with number of batches as the activity driver. If the Minneapolis plant forecasts 85 batches for November, what will be the estimated overhead cost?
3. Which of the two regression equations (from part 1 & 2) does a better job of predicting overhead costs? Explain why
Cost Management Accounting and Control
ISBN: 978-0324559675
6th Edition
Authors: Don R. Hansen, Maryanne M. Mowen, Liming Guan