Question
In: Accounting
Scatter Diagrams and High-Low Cost Estimation From April 1 through October 31, Will County Highway Department...
Scatter Diagrams and High-Low Cost
Estimation
From April 1 through October 31, Will County Highway Department
hires temporary employees to mow and clean the right-of-way along
county roads. The County Road Commissioner has asked you to help
her in determining the variable labor cost of mowing and cleaning a
mile of road. The following information is available regarding
current-year operations:
| Month | Miles Mowed and Cleaned |
Labor Costs |
|---|---|---|
| April | 350 | $14,400 |
| May | 300 | 13,500 |
| June | 400 | 16,200 |
| July | 250 | 9,900 |
| August | 375 | 15,300 |
| September | 200 | 9,000 |
| October | 100 | 8,640 |
a. Use the information from the high- and low-volume months to
develop a cost-estimating equation for monthly labor costs.
| Monthly labor costs | = | Answer | + | Answer | X |
b. Plot the data on a scatter diagram. Using the information from
representative high- and low volume months, use the high-low method
to develop a cost-estimating equation for monthly labor costs.
| Monthly labor costs | = | Answer | + | Answer | X |
d. Adjust the equation developed in requirement (b) to incorporate
the effect of an anticipated 7 percent increase in wages.
| Monthly labor costs | = | Answer | + | Answer | X |
Solutions
Expert Solution
SOLUTION:
a) High Low Method :
Variable Cost = (Highest Activity Cost−Lowest Activity Cost)/(Highest Activity Units-Lowest Activity Units)
Highest Activity Units = 400 Miles
Highest Activity Cost = $ 16,200
Lowest Activity Units = 100 Miles
Lowest Activity Cost = $ 8640
Variable Cost = ($16,200 - $8640)/(400-100)
= 7560/300
Variable Cost Per Mile = $ 25.2 per Mile.
Fixed Cost = Highest Activity Cost − (Variable Cost * Highest activity Units)
Fixed Cost = $ 16,200 - ($25.2*400)
= $ 16,200 - $ 10,080
Fixed Cost = $ 6,120
b) Scatter Diagram :
Equation (y = mx+c ) = Labour Cost = $25.2*(Miles) + Fixed Cost
Eg: Labour Cost at 400 Miles = ($25.2 * 400) + 4800
Labour Cost = $14,880
c) If the wage rate increases by 7%,
Variable cost Per Mile = $25.2 + (25.2*7%)
Revised Variable cost per Mile = $ 25.2 + 1.764 = $ 26.964
Cost Equation will be : Labour Cost = $26.964 * (Miles) + Fixed Cost
Labour Cost = $26.964 * (Miles) + $ 4,800
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