This is from Cornerstones of Cost Management Exercise 3.33 Problem 3.33 High-Low

Question

This is from Cornerstones of Cost Management Exercise 3.33

Problem 3.33 High-Low Method, Method of Least Squares, Correlation, Confidence Interval Big Mike's, a large hardware store, has gathered data on its overhead activities and associated costs for the past 10 months. Nizam Sanjay, a member of the controller's department, believes that overhead activities and costs should be classified into groups that have the same driver. He has decided that unloading incoming goods, counting goods, and inspecting goods can be grouped together as a more general receiving activity, since these three activities are all driven by the number of receiving orders. The 10 months of data shown on page 134 have been gath- ered for the receiving activity. (continued) Month Receiving Orders Receiving Cost 1,000 $12,170 1,340 12,940 13,750 1,150 900 9,930 15,070 1,350 1,400 14,145 16,640 1,600 1,490 14,800 1,800 17,940 10 1,700 15,000

Explanation / Answer

Answer 2)

Orders   Cost
Month 1   1000   12170
Month 7   1600   16640
      
Two Functions are then

1000v + f = 12170 and

1600v + f = 16640

where v = variable cost per order and f = Total fixed cost

after solving the equations we get the values

v = 7.45 and f= 4720

so the cost formula is

Receiving Cost = 7.45 * Receiving orders + 4720

Answer 3) Using the high low method

   Orders   cost
Highest point   1800   17940
Lowest point   900   9930

So after solving the equation we get the values

v = 8.9 and f = 1920

So, the cost formula

Receiving Cost = 8.9 * Receiving orders + 1920

Answer 4)

Regression summary

Multiple R = 0.905997649

R square = 0.8208317399

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