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1. The regression equation's intercept on the vertical axis is $190. It represents the
portion of indirect material cost that does not vary with machine hours when
operating within the relevant range. The slope of the regression line is $5 per machine
hour. For every machine hour, $5 of indirect material costs are expected to be
incurred. 2. Estimated cost of indirect material at 850 machine hours of activity:
S = $190 + ($5 × 850)
= $4,440 3. Several questions should be asked:
(a) Do the observations contain any outliers, or are they all representative of normal
operations? (b) Are there any mismatched time periods in the data? Are all of the indirect
material cost observations matched properly with the machine hour
observations? (c) Are there any allocated costs included in the indirect material cost data? (d) Are the cost data affected by inflation? 4.
Beginning inventory.............................................................
+ Purchases..........................................................................
– Ending inventory...............................................................
Indirect material used..........................................................
5. April
$1,300
5,900
(1,350)
$5,850 Highlow method:
Variable cost per machine hour
= difference in cost levels
difference in activity levels = $5,850 − $4,200 $1,650
=
= $5.50 per machine hour
1,000 − 700
300 August
$1,000
6,200
(3,000)
$4,200 Fixed cost per month:
Total cost at 1,000 hours...............................................................................
Variable cost at 1,000 hours
($5.50 × 1,000)........................................................................................
Fixed cost....................................................................................................... $5,850
5,500
$ 350 Equation form:
Indirect material cost = $350 + ($5.50 × machine hours)
6. The regression estimate should be recommended because it uses all of the data, not
just two pairs of observations when developing the cost equation. ...
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This note was uploaded on 02/18/2012 for the course BUSE 237 taught by Professor Sf during the Spring '12 term at Simon Fraser.
 Spring '12
 sf

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