Question

Question 1

Harbour Inc. collected the following data for the first six months of the year concerning its overhead costs and machine hours used.

Month	Overhead Costs ($)	Machine Hours
Jan	$62,000	400
Feb	52,000	320
Mar	64,000	395
Apr	58,000	350
May	57,000	350
June	54,000	325

Required -

a)            Harbour suspects that machine hours are driving overhead costs. Use the high-low method to calculate the:

i.             variable cost per machine hour;

ii.                monthly fixed cost.

b)           Harbour predicts that 375 machine hours will be used in July. Calculate the estimated overhead cost for July.

c)            Why is the high-low method inferior to the regression estimation method (provide 1 reason only)?

Answer 1

Using High Low Method

Variable Cost Per Unit	=Highest Activity Cost - Lowest Activity Cost Highest Activity Unit - Lowest Activity Unit
So Variable Cost per machine hour	= 62000-52000 400-320
	= 125

Here 62000 is taken as highest instead of 64000 because overhead cost is driven by machine hours and maximum machine hours worked are 400 so overhead cost corresponding to highest and lowest machine hours will be taken.

a)

(i)So Variable cost per machine hour = $125

(ii) Monthly Fixed Cost = 62000 - (400*125) = $12000

b) Estimated Overhead Cost = 12000 + (375*125) = $58875

c) The high low method is inferior to regression analysis as it gives unreliable data as it only considers two extreme activity levels which may not be even representing the whole cost data.