High-Low Cost Estimation and Simple Regression Analysis


Assume we have the following observations relating to overhead costs and direct labor hours for Department A of the ABC Company.


Direct Labor Hours Overhead Costs

15 40

20 50

14 35

13 30

18 44

15 36

12 31

16 41

18 42

19 45

Required:


1. Determine the budgeted overhead costs for Department A in a month where there are 13 direct labor hours if the high-low method of estimating cost behavior patterns is used.


2. Using regression analysis determine what the budeted overhead cost should be in a month when Department A should work 13 direct labor hours.


3. Does the regression line in #2 explain the data well? Why?


4. What is the range within which 95 percent of the observations should lie?