Salter Manufacturing Company produces inventory in a highly automated assembly plant in Fall River, Massachusetts. 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 operations, the following data were collected: Machine-hours Kilowatt-hours Total Overhead Costs January 4,560 5,424,000 $405,600 February 4,380 5,208,000 404,160 March 4,680 5,400,000 407,040 April 3,960 5,148,000 404,160 May 3,900 5,040,000 391,200 June 3,720 4,944,000 384,000 Required: a. Use the high-low method to determine the estimating cost function with machine-hours as the cost driver. b. Use the high-low method to determine the estimating cost function with kilowatt-hours as the cost driver. c. For July, the company ran the machines for 4,000 hours and used 4,550,000 kilowatt-hours of power. The overhead costs totaled $365,000. Which cost driver was the best predictor for July

a. Total overhead = $294,720 + $24 × machine hours

b. Total overhead = $137,040 + $0.05 × Kilowatt-hours

c. The kilowatt-hours was the best predictor for July

Explanation:

High low method is used to separate the variable cost and fixed costs elements in a Semi-Variable Cost item.

machine-hours as cost driver.

First find the 2 points : the High and the Low

High Point : March

Machine-hours  = 4,680

Total Overhead = $ 407,040

Low Point : June

Machine-hours  = 3,720

Total Overhead = $ 384,000

Next find the Difference in the overhead cost and the cost driver of the 2 points

Overheads = $23,040

Machine-hours  = 960

Find the Variable cost element

Variable cost = difference in overhead / difference in cost driver

                      = $23,040 / 960

                      = $24

Find the Fixed Cost Element.

Fixed Cost = Total Overhead - Variable Overhead

selecting the high point, this will be :

                  = $ 407,040 - (4,680 × $24)

                  = $294,720

Determine the Cost function

Total overhead = $294,720 + $24 × machine hours

machine-hours as cost driver.

First find the 2 points : the High and the Low

High Point : March

Kilowatt-hours  = 5,400,000

Total Overhead = $ 407,040

Low Point : June

Kilowatt-hours  = 4,944,000

Total Overhead = $ 384,000

Next find the Difference in the overhead cost and the cost driver of the 2 points

Overheads = $23,040

Kilowatt-hours  = 456,000

Find the Variable cost element

Variable cost = difference in overhead / difference in cost driver

                      = $23,040 / 456,000

                      = $0.05

Find the Fixed Cost Element.

Fixed Cost = Total Overhead - Variable Overhead

selecting the high point, this will be :

                  = $ 407,040 - (5,400,000 × $0.05)

                  = $137,040

Determine the Cost function

Total overhead = $137,040 + $0.05 × Kilowatt-hours

Apply the machine hours for july

Total overhead = $294,720 + $24 × machine hours

                          = $294,720 + $24 × 4,000

                          = $390,720

Apply kilowatt-hours for july

Total overhead = $137,040 + $0.05 × Kilowatt-hours

                         = $137,040 + $0.05 × 4,550,000

                         = $364,540

Conclusion :

The kilowatt-hours was the best predictor for July

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