Question

In: Accounting

Albedo Inc. manufactures high-end replacement telescope lenses for amateur and professional astronomers who are seeking to...

Albedo Inc. manufactures high-end replacement telescope lenses for amateur and professional astronomers who are seeking to upgrade the performance of their telescopes. You have just become employed as a staff accountant at Albedo and Jordan Coleman, the controller, has asked you to help with maintenance cost estimation for the lens manufacturing process. You review the manufacturing process and decide that the best cost driver for maintenance costs is labor hours. The data below are from the previous fiscal year for maintenance expense and labor hours:

Month	Maintenance Cost		Labor Hours
1		$2,870	2,630
2		3,150	2,740
3		3,280	2,840
4		3,825	3,265
5		3,640	3,080
6		4,565	3,770
7		3,940	3,320
8		4,940	4,140
9		4,755	3,940
10		5,010	4,125
11		5,080	4,330
12		4,220	3,480

Required:

What is the cost equation for maintenance cost using the high-low method? (Round "constant" to nearest whole dollar. Round "slope" to 2 decimal places. Negative amounts should be indicated by a minus sign.)

Required:

What is the cost equation for maintenance cost using the high-low method? (Round "constant" to nearest whole dollar. Round "slope" to 2 decimal places. Negative amounts should be indicated by a minus sign.)

Maintenance cost = ______________ + (__________ x __________)

Expert Solution

Under high-low method, the data of highest activity and lowest activity is used for calculating constant and slope.

The highest activity (i.e. highest labor hours) is in 11th month (i.e. 4,330 hours) with maintenance cost of $5,080 and the lowest labor hours is in 1st month (i.e. 2,630 hrs) with maintenance cost of $2,870.

Variable maintenance cost per hour

= (Maintenance cost in 11th month-Maintenance cost in 1st month)/(Lab hrs in 11th month - Labor hrs in 1st month)

= ($5,080-$2,870)/(4,330 hrs-2,630 hrs) = $2,210/1,700 hrs = $1.30 per hour

Slope is equal to variable cost per unit i.e $1.30 per hour in this case.

Constant is equal to fixed cost.

Fixed cost = Total maintenace cost in 1st month - Total Variable cost in 1st month

= $2,870 - ($1.30 per hour*2,630 hrs)

= $2,870 - $3,419 = -$549 per month

Constant is negative (i.e. -549)

The cost equation for Maintenance cost using the high-low method is shown as follows:-

Y = a+bx

Where Y = Maintence cost

a = Constant (i.e. Fixed cost)

b = Slope (i.e. Variable cost per unit)

X = Labor hours used in a particular month.

Y = -549+1.3X

Maintenance cost = -549 + (1.3 *X)

ekkarill92 answered 11 months ago

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