COST ACCOUNTING
16th Edition
ISBN: 9781323169261
Author: Horngren
Publisher: PEARSON C
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Chapter 10, Problem 10.32E
High-low, regression. May Blackwell is the new manager of the materials storeroom for Clayton Manufacturing. May has been asked to estimate future monthly purchase costs for part #696, used in two of Clayton’s products. May has purchase cost and quantity data for the past 9 months as follows:
Manufacturing. May has been asked to estimate future monthly purchase costs for part #696, used in two of Clayton’s products. May has purchase cost and quantity data for the past 9 months as follows:
| Month | Cost of Purchase | Quantity Purchased |
| January | $12,675 | 2,710 parts |
| February | 13,000 | 2,810 |
| March | 17,653 | 4,153 |
| April | 15,825 | 3,756 |
| May | 13,125 | 2,912 |
| June | 13,814 | 3,387 |
| July | 15,300 | 3,622 |
| August | 10,233 | 2,298 |
| September | 14,950 | 3,562 |
Estimated monthly purchases for this part based on expected demand of the two products for the rest of the year are as follows:
| Month | Purchase Quantity Expected |
| October | 3,340 parts |
| November | 3,710 |
| December | 3,040 |
- 1. The computer in May’s office is down, and May has been asked to immediately provide an equation to estimate the future purchase cost for part #696. May grabs a calculator and uses the high-low method to estimate a cost equation. What equation does she get?
Required
- 2. Using the equation from requirement 1, calculate the future expected purchase costs for each of the last 3 months of the year.
- 3. After a few hours May’s computer is fixed. May uses the first 9 months of data and regression analysis to estimate the relationship between the quantity purchased and purchase costs of part #696. The regression line May obtains is as follows:
Evaluate the regression line using the criteria of economic plausibility, goodness of fit, and significance of the independent variable. Compare the regression equation to the equation based on the high-low method. Which is a better fit? Why?
- 4. Use the regression results to calculate the expected purchase costs for October, November, and December. Compare the expected purchase costs to the expected purchase costs calculated using the high-low method in requirement 2. Comment on your results.
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Students have asked these similar questions
Thane Company is interested in establishing the relationship between electricity costs and machine hours. Data have been collected and a regression analysis prepared using Excel. The monthly data and the regression output follow:
Month
Machine Hours
Electricity Costs
January
2,500
$
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February
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21,000
March
1,900
13,500
April
3,100
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May
3,800
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June
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July
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22,750
September
2,000
15,500
October
3,700
26,000
November
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31,000
December
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27,750
Summary Output
Regression Statistics
Multiple R
0.965
R Square
0.932
Adjusted R2
0.925
Standard Error
1,425.18
Observations
12.00
Coefficients
Standard Error
t Stat
P-value
Lower 95%
Upper 95%
Intercept
3,726.88
1,682.82
2.21
0.05
(22.69)
7,476.45
Machine Hours
5.77
0.49
11.7
0.00
4.67
6.87
The percent of the total variance that can be explained by the regression is:…
The manager of the main laboratory facility at UrbanFit Center is interested in being able to predict the overhead costs each month for the lab. The manager believes that total overhead varies with the number of lab tests performed I
that some costs remain the same each month regardless of the number of lab tests performed. The lab manager collected the following data for the first seven months of the year.
(Click the icon to view the data.)
Use the high-low method to determine the laboratory's cost equation for total laboratory overhead. Use your results to predict total laboratory overhead if 3,500 lab tests are performed next month.
Let's begin by determining the formula that is used to calculate the variable cost (slope).
Data table
Variable cost (slope)
Number of Lab
Month
Tests Performed
Total Laboratory
Overhead Costs
January
2,800
$21,500
February
2,600
$22,700
March
3,100
$27,900
April....
3,550
$31,400
May
3,700
$28,500
June..
1,200
$19,500
July
1,400
$14,500
Print
Done
X
The manager of Trusty Car Inspection reviewed the monthly operating costs for the past year. The costs ranged from $4,300 for 1,300 inspections to $3,900 for 900 inspections.
Requirements 1. Use the high-low method to calculate the variable cost per inspection. 2. Calculate the total fixed costs. 3. Write the equation and calculate the operating costs for 1,000 inspections. 4. Draw a graph illustrating the total cost under this plan. Label the axes, and show the costs at 900, 1,000, and 1,300 inspections.
Chapter 10 Solutions
COST ACCOUNTING
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