Extra Accessories produces a navigation system for motor vehicles. Its assembly department is largely mechanised and most of the costs of the department are produced by the two overhead support centres – assemby support and machine service. Each department is evaluated by comparing its actual costs with its flexed budget. During the past 12 months, the assembly department’s cost variances have been negative in most months and its manager attributes this to the inaccurate budgeting of overhead support costs. The assembly manager is very keen to establish a better basis for projecting the budgets for the next 12 months and has asked you to undertake a cost investigation as a basis for improved budgetary preparation.
Your first step was to collect data for the last 12 months for the overhead support departments:

You have carried out regression analysis on each pair of dependent/independent variables and the results are as follows:

(a) For next month the expected output is 6800 units. Provide cost forecasts for both departments at that level of output.

(b) Using the high–low method, determine the fixed costs and unit variable costs for both overhead support departments and project total costs for both departments when 6800 units are produced.

(c) Explain why the estimates obtained in

(a) and

(b) above are different.

(d) Discuss three limitations with regard to the use of regression in cost estimation.

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Month Units produced Assembly support costs 000 12345 6789012 1 8000 37.9 Machine service costs 000 70 7400 33.8 66.9 7000 30.5 65.1 6500 33.9 63.2 5 6200 32.4 61.2 8000 39.3 70.1 5000 28.2 56.2 4300 26.6 53.5 6200 33.8 61.2 8200 39.4 71.1 11 8000 38.1 70.3 9200 41.5 76.5