Methods of Estimating Costs: High-Low
Adriana Corporation manufactures football equipment. In planning for next year, the managers want to understand the relation between activity and overhead costs. Discussions with the plant supervisor suggest that overhead seems to vary with labor-hours, machine-hours, or both. The following data were collected from last year's operations:
|
Month
|
Labor-Hours
|
Machine-Hours
|
Overhead Costs
|
|
1
|
3,625
|
6,775
|
$513,435
|
|
2
|
3,575
|
7,035
|
518,960
|
|
3
|
3,400
|
7,600
|
549,575
|
|
4
|
3,700
|
7,265
|
541,400
|
|
5
|
3,900
|
7,955
|
581,145
|
|
6
|
3,775
|
7,895
|
572,320
|
|
7
|
3,700
|
6,950
|
535,110
|
|
8
|
3,625
|
6,530
|
510,470
|
|
9
|
3,550
|
7,270
|
532,195
|
|
10
|
3,975
|
7,725
|
565,335
|
|
11
|
3,375
|
6,490
|
503,775
|
|
12
|
3,550
|
8,020
|
564,210
|
Required
a. Use the high-low method to estimate the fixed and variable portions of overhead costs based on machine-hours.
b. Managers expect the plant to operate at a monthly average of 7,500 machine-hours next year. What are the estimated monthly overhead costs, assuming no inflation?