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:

Month	Overhead		Direct Labour- Hours	Jobs
January	$	75,345	5,081	500
February	$	69,791	3,848	350
March	$	72,293	4,290	400
April	$	81,517	5,766	550
May	$	57,582	2,214	200
June	$	68,664	3,457	250
July	$	78,651	5,300	500
August	$	81,882	6,714	600
September	$	77,991	5,408	500
October	$	68,655	3,924	350
November	$	70,186	4,200	400
December	$	83,734	6,000	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

Estimate the costs with High- Low Method Direct Labor Overhead Month Hours High level of Activity low level of Activity August May 81882 6714 57582 2214 Difference 4500 24300 Answers = Y= $45,626+$5.40X Varaible cost (24300/4500) Fixed Cost (81882-(6714*5.40) Cost Equation 5.40 Per DLH 45626 Per Month Y= $45,626+$5.40X Variable Cost =Difference in Overhead / Difference in DLH Fixedcost = Overhead -(DLH *Variable cost Per DLH)