Hartman Company’s Lucas plant manufactures thermostatic controls. Plant management has experienced fluctuating monthly overhead costs and wants to estimate overhead costs accurately to plan its operations and its financial needs. Interviews with plant personnel and studies reported in trade publications suggest that overhead in this industry tends to vary with labor-hours.

A member of the controller’s staff proposed that the behavior pattern of these overhead costs be determined to improve cost estimation. Another staff member suggested that a good starting place for determining cost behavior patterns is to analyze historical data. Following this suggestion, monthly data were gathered on labor-hours and overhead costs for the past two years.

No major changes in operations occurred over this period of time. The data are shown in the following table:

Required

a. Use the high-low estimation method to estimate the overhead cost behavior (fixed and variable portions components of cost) for the Lucas plant.

b. Prepare a scattergraph showing the overhead costs plotted against the labor-hours.

c. Guwse a spreadsheet program to compute regression coefficients to describe the overhead cost equation.

d. Use the results of your regression analysis to develop an estimate of overhead costs assuming 200,000 labor-hours will be worked next month.

Transcribed Image Text:

Month Labor-Hours Overhead Costs 123456789012345678 143,750 $1,566,402 136,250 1,237,846 110,000 1,086,992 155,000 1,480,437 185,000 1,755,321 166,250 1,496,092 155,000 1,417,275 143,750 1,568,890 132,500 1,263,885 10. 196,250 1,964,402 11. 106,250 1,322,535 12. 132,500 1,457,503 13. 218,750 2,059,262 14. 215,000 1,945,592 15. 166,250 1,723,710 16. 226,250 2,079,046 17. 203,750 2,030,792 18. 185,000 1,823,781 19. 222,500 1,989,551 20. 181,250 1,839,725 21 196,250 1,997,385 22 192,500 1,832,719 23. 218,750 2,057,498 24. 215,000 2,135,233