Tessmer Manufacturing Company produces inventory in a highly automated assembly

Question

Tessmer Manufacturing Company produces inventory in a highly automated assembly plant in Olathe, KS. The automated system is in its first year of operation and management is still unsure of the best way to estimate the overhead costs of operations for budgetary purposes. For the first six months of operation, the following data was collected:
Machine-hours Kilowatt-hours Total Overhead Costs
January 3,800 4,520,000 $138,000
February 3,650 4,340,000 136,800
March 3,900 4,500,000 139,200
April 3,300 4,290,000 136,800
May 3,250 4,200,000 126,000
June 3,100 4,120,000 120,000
Question 1: Use the high-low method to determine the estimating cost function with machine-hours as the cost driver. (five points)
Question 2: Use the high-low method to determine the estimating cost function with kilowatt-hours as the cost driver. (five points)
Question 3: For July, the company ran the machines for 3,000 hours and used 4,000,000 kilowatt-hours of power. The overhead costs totaled $114,000. Which cost driver was the best predictor for July? (five points)

Explanation / Answer

a. Use the high-low method to determine the estimating cost function with machine-hours as the cost driver. Highest level of Machine-hours is 3900 for Month of March with overhead cost of $139,200 And Lowest is 3,100 for June with overhead cost $120,000. So variable cost per Machine Hour = (139200-120000)/(3900-3100) = $24 Fixed Cost = 139200-3900*24 = $45,600 So Cost Function = $45600 + Machine Hour*$24 b. Use the high-low method to determine the estimating cost function with kilowatt-hours as the cost driver. Highest level of kilowatt-hours is 4,520,000 for Month of January with overhead cost of $138,000 and Lowest is 4,120,000 for June with overhead cost $120,000. So variable cost per kilowatt-hour = (138000-120000)/(4,520,000-4,120,000) = $0.045 Fixed Cost = 138000-4520000*.045 = -65400 So Cost Function = -$65400 + kilowatt-hour *$0.045 c. For July, the company ran the machines for 3,000 hours and used 4,000,000 kilowatt-hours of power. The overhead costs totaled $114,000. Which cost driver was the best predictor for July? Predicted Cost if machine-hours is used as Cost Driver = $45600 + Machine Hour*$24 =$45600+3000*24 = $117,600 Predicted Cost if kilowatt-hour is used as Cost Driver = -$65400 + kilowatt-hour *$0.045 = -65600+4000000*.045 = 114,400 Kilowatt-hour is the better predictor for July as it give the predicted cost which is closer to the actual cost incurred.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.