Chapter 6, Problem 6.63AP

Analyze cost behavior (Learning Objectives 1, 2, 3, & 4)

Pursell Industries is in the process of analyzing its manufacturing overhead costs. Management is not sure if the number of units produced or number of direct labor (DL) hours is the best cost driver to use for predicting manufacturing overhead (MOH) costs. The following information is available:

Requirements

1. 1. Are manufacturing overhead costs fixed, variable, or mixed? Explain.
2. 2. Graph the company’s manufacturing overhead costs against DL hours. Use Excel or graph by hand.
3. 3. Graph the company’s manufacturing overhead costs against units produced. Use Excel or graph by hand.
4. 4. Do the data appear to be sound, or do you see any potential data problems? Explain.
5. 5. Use the high-low method to determine the company’s manufacturing overhead cost equation using DL hours as the cost driver. Assume that management believes all data to be accurate and wants to include all of it in the analysis.
6. 6. Estimate manufacturing overhead costs if the company incurs 26,000 DL hours in January.