Question

Waverley Welding Company provides welding services for a variety of industrial customers in the manufacturing, aerospace, and electronics industries. The number of jobs completed from one month to the next varies considerably, and jobs differ in terms of the complexity of the welding requirements. More complex jobs can take significantly longer to complete. Management knows that overhead costs have a fixed and a variable component but, until now, has not attempted to determine which measure of activity should be used for planning and forecasting. The table below shows data for the most recent fiscal year. Management believes that either the number of jobs completed each month or the number of direct labour-hours incurred each month could be used as the activity base. However, they are not sure which is more appropriate: Direct Labour- Overhead Jobs Month Hours 6,081 January February 76,345 70,791 73,293 82,517 47,682 500 4,848 5,290 6,766 3,214 350 400 March April May 550 200 4,457 6,300 June 69,664 250 July August September 79,651 82,882 78,991 500 600 8,714 6,408 4,924 500 69,655 71,186 84,734 350 October November 5,200 7,000 400 December 510 Overhead includes costs such as the maintenance supervisor's salary, depreciation on the welding equipment, and indirect materials used on each job. Electricity costs are also included in overhead and are significant since welding equipment consumes a relatively high amount of energy. Waverley Welding also employs a mix of experienced and inexperienced welders. Experienced welders are paid a higher hourly wage but are more efficient and tend to incur less wastage of indirect materials. Inexperienced welders are of course paid less on a per hour basis but work more slowly and use more indirect materials. Required: 4. Use the high-low method to estimate a cost formula for maintenance, considering direct labour hours as the activity base. (Round variable cost to 2 decimal place and fixed cost to the nearest dollar amount.)

Answer 1

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Waverly Welding
	High Low method
Variable cost=	(Highest activity cost- Lowest activity cost)/ (Highest activity units- Lowest activity units)
Highest activity is in August. Labor hours is 8714 which is highest among all other months. Overhead cost in August is 82,882.
Lowest activity is in May. Labor hours is 3214 which is lowest among all other months. Overhead cost in May is 47,682.
	Overhead	Direct Labor hours
Highest activity	82,882.00	8,714.00
Lowest activity	47,682.00	3,214.00
Difference	35,200.00	5,500.00
Variable cost per unit	6.40
Fixed cost	Highest activity cost- (Highest units * Variable cost per unit)
Fixed cost	82,882-(8,714*6.40)
Fixed cost	27,112.00
So overhead cost equation is
Y= 27,112+ 6.40X