Problem 14-41 SCATTERGRAPH, HIGH-LOW METHOD, AND PREDICTING COST FOR A DIFFERENT TIME PERIOD FROM THE ONE USED TO DEVELOP A COST FORMULA

Farnsworth Company has gathered data on its overhead activities and associated costs for the past 10 months. Tracy Heppler, a member of the controller’s department, has convinced management that overhead costs can be better estimated and controlled if the fixed and variable components of each overhead activity are known. One such activity is receiving raw materials (unloading incoming goods, counting goods, and inspecting goods), which she believes is driven by the number of receiving orders. Ten months of data have been gathered for the receiving activity and are as follows:

 

Month	Receiving Orders	Receiving Cost ($)
1	1,000	18,000
2	700	15,000
3	1,500	28,000
4	1,200	17,000
5	1,300	25,000
6	1,100	21,000
7	1,600	29,000
8	1,400	24,000
9	1,700	27,000
10	900	16,000

Required:

1.        Prepare a scattergraph based on the 10 months of data. Does the relationship appear to be linear?

2.        Using the high-low method, prepare a cost formula for the receiving activity. Using this formula, what is the predicted cost of receiving for a month in which 1,450 receiving orders are processed?

 

 

 

 

 

 

 

 

3.        Prepare a cost formula for the receiving activity for a quarter. Based on this formula, what is the predicted cost of receiving for a quarter in which 4,650 receiving orders are anticipated? Prepare a cost formula for the receiving activity for a year. Based on this formula, what is the predicted cost of receiving for a year in which 18,000 receiving orders are anticipated?