Discuss and provide Detailed Explanations and references to the following questions. Answer only if you are SURE.
(a) Explain the advantages and disadvantages of the high-low method of cost estimation. (b)Central Machinery Ltd. is preparing its budget for the year ending 30 June 2004. For the fuel expenses consumption it is decided to estimate an equation of the form, y = a + bx, where y is the total expense at an activity level x, a is the fixed expense and b is the rate of variable cost. The following information relate to the year ended 30 June 2003: Month Machine Fuel Oil Month Machine Fuel oil hours expense hours expense 2003 (Sh. '000') (Sh. '000') 2004 (Sh. (Sh. '000') '000') July 34 640 January 26 500 August 30 620 February 26 500 September 34 620 March 31 530 October 39 590 April 35 550 November 42 500 May 43 580 December 32 530 June 48 680 The annual total and monthly average figures for the year ended 30 June 2003 were as follows: Machine hours Fuel oil expense (000") (Sh. '000") Annual total 420 6,840 Monthly average 35 570 Required: (1) Using the high-low method, estimate and interpret the fixed and variable cost elements of the fuel oil expense. (ii) Using the results in (i) above, predict the fuel oil expense for November 2004 if experience indicates that 41,000 machine hours will be used. (iii) Briefly explain any two limitations of High-low method of cost estimation that may be overcome by using simple linear regression analysis.November using the FIFO method. iv) Use the regression function formulated in (ii) above to estimate the overhead cost for the month of November. QUESTION 2The following information is provided to you for analysis: Year 2004 Equivalent production Overheads Month Units (*000") Sh.'000' January 1,425 12,185 February 950 9,875 March 1,130 10,450 April 1,690 15,280 May 1,006 9.915 June 834 9,150 July 982 10,133 August 1,259 11,981 September 1,385 12,045 October 1,420 13,180 November 1,125 13,180 December 980 10.430 Additional information: 1. In November, the opening work in progress inventory contained 1,000,000 units that were 30% complete with respect to conversion costs. 2. During the same month of November, the manufacturing department transferred 1,500,000 units. 3. The closing inventory for the month of November was 1,200,000 units and the units were 305 incomplete with respect to conversion costs 4. Using the above information, you have obtained the following variables by applying simple regression analysis. Sh. *000' Constant 3,709 Slope 6,487 Required: i) Use the high-low method to estimate the overhead cost function. ii) Use the regression method to determine the overhead cost function. iii) Compute the equivalent units of production with respect to conversion costs for the month of November using the FIFO method iv) Use the regression function formulated in (ii) above to estimate the overhead cost for the month of November
