Problem - Tessmer Manufacturing Company produces inventory in a highly automated assembly plant in Olathe, KS. The automated system is in its first year of operation and management is still unsure of the best way to estimate the overhead costs of operations for budgetary purposes. For the first six months of operation, the following data was collected:
|
Costs
|
Machine hours
|
Kilowatt hours
|
Total Overhead
|
|
January
|
3,800
|
4,520,000
|
$138,000
|
|
February
|
3,650
|
4,340,000
|
136,800
|
|
March
|
3,900
|
4,500,000
|
139,200
|
|
April
|
3,300
|
4,290,000
|
136,800
|
|
May
|
3,250
|
4,200,000
|
126,000
|
|
June
|
3,100
|
4,120,000
|
120,000
|
Question 1: Use the high-low method to determine the estimating cost function with machine-hours as the cost driver.
Question 2: Use the high-low method to determine the estimating cost function with kilowatt-hours as the cost driver.
Question 3: For July, the company ran the machines for 3,000 hours and used 4,000,000 kilowatt-hours of power. The overhead costs totaled $114,000. Which cost driver was the best predictor for July?