Jason Company produces inventory in a highly automated assembly plant in Bath, U
ID: 2485370 • Letter: J
Question
Jason Company produces inventory in a highly automated assembly plant in Bath, Utah. 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?
Explanation / Answer
Machine-hours Kilowatt-hours Total Overhead Cost Jan 4,560 5,424,000 405,600 Feb 4,380 5,208,000 404,160 Mar 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 Total 25,200 31,164,000 2,396,160 A Overhead Rate/Machine Hr = =$2396000/25200 hr $95.09/hr B Overhead Rate/Killowat Hr = =$2396000/31164000 hr =$0.08/hr C If Absorbed O/H on the basis of M/c hr = Overhead Rate*Machine hr =95.09 $*4000 hr 380,360 $ If Absorbed O/H on the basis of KW hr = Overhead Rate*Kilowatt hr =0.08 $*4550000 hr 364,000 $ Actual Overhead incurred = $365000 It is better to absorbe o/h on the basis of kwhr. As the overhead absorbed is near to the actual overhead
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