MI – May 2017 – L1 – SB – Q2 – Forecasting Techniques

Determine fixed and variable costs using high-low method and linear regression analysis.

Question

MICRA Manufacturing Company makes a product named as VATA. The records of some of the manufacturing expenses are easily identified as fixed or directly varied with production. The cost accountant of the company is confronted with the problem of preparing a budget for the coming year and wishes to determine the fixed and variable elements of the mixed factory overhead.

The following monthly information in respect of output and mixed factory overhead are provided as follows:

MONTH	NUMBER OF UNITS (x)	MIXED FACTORY OVERHEAD (y)
JANUARY	150	80
FEBRUARY	200	100
MARCH	300	135
APRIL	250	125
MAY	300	130
JUNE	250	120
JULY	350	140
AUGUST	300	125
SEPTEMBER	250	115
OCTOBER	150	80

Required:

a. Calculate the fixed and variable elements of the above mixed factory overhead using the high and low method. (5 Marks)

b. Use the linear regression analysis and determine the line of best fit. (15 Marks)

Answer

a. Using High and Low Methods

Total Fixed Cost

b. Linear Regression Analysis

Data Preparation:

Month	Units (x)	Cost (y)	$x^2$	$x y$
January	150	80	22,500	12,000
February	200	100	40,000	20,000
March	300	135	90,000	40,500
April	250	125	62,500	31,250
May	300	130	90,000	39,000
June	250	120	62,500	30,000
July	350	140	122,500	49,000
August	300	125	90,000	37,500
September	250	115	62,500	28,750
October	150	80	22,500	12,000
Total	2,500	1150	665,000	300,000