Goulburn, Incorporated produces parts for heavy equipment used in mining and construction. The plant that produces one part common to many vehicles is highly automated, so all labor is considered part of factory overhead. The plant manager, who has just been promoted, would like to understand how overhead costs fluctuate in order to improve planning and budgets. After discussions with both financial and operations members of the plant staff, there is general agreement that the best cost driver for overhead is machine-hours. Monthly data were collected from the most recent two years on machine-hours and overhead. More months of data were available, but a process change had taken place about 30 months earlier, so the staff believed any data from before that time would be misleading. The data are shown in the following table: Month Machine-Hours Factory Overhead 1 39,300 $ 527,100 2 37,300 416,500 3 30,100 365,800 4 42,400 498,200 5 50,600 590,700 6 45,500 503,400 7 42,400 476,900 8 62,100 702,400 9 36,300 425,300 10 53,700 661,000 11 52,700 616,700 12 36,300 490,500 13 59,900 693,000 14 58,900 654,700 15 45,500 580,000 16 39,300 527,900 17 55,800 683,400 18 50,600 613,700 19 60,900 669,500 20 49,600 619,100 21 53,700 672,100 22 29,100 445,000 23 59,900 692,400 24 58,900 718,500 Required: Use the high-low estimation method to estimate the overhead cost behavior (fixed and variable components of cost) for the Goulburn plant.

FINANCIAL ACCOUNTING
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ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Goulburn, Incorporated produces parts for heavy equipment used in mining and construction. The plant that produces one part common to many vehicles is highly automated, so all labor is considered part of factory overhead. The plant manager, who has just been promoted, would like to understand how overhead costs fluctuate in order to improve planning and budgets. After discussions with both financial and operations members of the plant staff, there is general agreement that the best cost driver for overhead is machine-hours.

Monthly data were collected from the most recent two years on machine-hours and overhead. More months of data were available, but a process change had taken place about 30 months earlier, so the staff believed any data from before that time would be misleading. The data are shown in the following table:

Month Machine-Hours Factory Overhead
1 39,300 $ 527,100
2 37,300 416,500
3 30,100 365,800
4 42,400 498,200
5 50,600 590,700
6 45,500 503,400
7 42,400 476,900
8 62,100 702,400
9 36,300 425,300
10 53,700 661,000
11 52,700 616,700
12 36,300 490,500
13 59,900 693,000
14 58,900 654,700
15 45,500 580,000
16 39,300 527,900
17 55,800 683,400
18 50,600 613,700
19 60,900 669,500
20 49,600 619,100
21 53,700 672,100
22 29,100 445,000
23 59,900 692,400
24 58,900 718,500

Required:

  1. Use the high-low estimation method to estimate the overhead cost behavior (fixed and variable components of cost) for the Goulburn plant.
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Why wouldn't 718,500 be the highest leve?  You've selected 702,400 as the highest?

 

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