SCATTERGRAPH, HIGH-LOW METHOD, AND PREDICTING COST FOR A DIFFERENT TIME PERIOD FROM THE ONE USED TO DEVELOP A COST FORMULA
Farnsworth Company has gathered data on its overhead activities and associated costs for the past 10 months. Tracy Heppler, a member of the controller's department, has convinced management that overhead costs can be better estimated and controlled if the fixed and variable components of each overhead activity are known. One such activity is receiving raw materials (unloading incoming goods, counting goods, and inspecting goods), which she believes is driven by the number of receiving orders. Ten months of data have been gathered for the receiving activity and are as follows:
|
Month
|
Receiving Orders
|
Receiving Cost ($)
|
|
1
|
1,000
|
18,000
|
|
2
|
700
|
15,000
|
|
3
|
1,500
|
28,000
|
|
4
|
1,200
|
17,000
|
|
5
|
1,300
|
25,000
|
|
6
|
1,100
|
21,000
|
|
7
|
1,600
|
29,000
|
|
8
|
1,400
|
24,000
|
|
9
|
1,700
|
27,000
|
|
10
|
900
|
16,000
|
Required:
1. Prepare a scattergraph based on the 10 months of data. Does the relationship appear to be linear?
2. Using the high-low method, prepare a cost formula for the receiving activity. Using this formula, what is the predicted cost of receiving for a month in which 1,450 receiving orders are processed?