Use high-low method to estimate the overhead cost behavior

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Use high-low method to estimate the overhead cost behavior

5-43 Interpretation of Regression results: Simple Regression Using a Spreadsheet

Hartman Company`s Lucas plant manufactures thermostatic controls. Plant management has experienced fluctuating monthly overhead costs and wants to estimate overhead costs accurately to plan its operations and its financial needs. Interviews with plant personnel and studies reported in trade publications suggest that overhead in this industry tends to vary with labor-hours.

A member of the controller`s staff proposed that the behavior pattern of these overhead costs be determined to improve cost estimation. Another staff member suggested that a good starting place for determining cost behavior patterns is to analyze historical data. Following this suggestion, monthly data were gathered on labor-hours and overhead costs for the past two years. No major changes in operations occurred over this period of time. The data are shown in the following table:

Month Labor-Hours Overhead Costs
1 251,563 $2,741,204.00
2 238,438 2,166,231.00
3 192,500 1,902,236.00
4 271,250 2,590,765.00
5 323,750 3,071,812.00
6 290,938 2,618,161.00
7 271,250 2,480,231.00
8 251,563 2,745,558.00
9 231,875 2,211,799.00
10 343,438 3,437,704.00
11 185,938 2,314,436.00
12 231,875 2,550,630.00
13 382,813 3,603,709.00
14 376,250 3,404,786.00
15 290,938 3,016,493.00
16 395,938 3,638,331.00
17 356,563 3,553,886.00
18 323,750 3,191,617.00
19 389,375 3,481,714.00
20 317,188 3,219,519.00
21 343,438 3,495,424.00
22 336,875 3,207,258.00
23 382,813 3,600,622.00
24 376,250 3,736,658.00


A. Use the high-low estimation method to estimate the overhead cost behavior (fixed and variable portions components of cost) for the Lucas plant.

B. Prepare a scattergraph showing the overhead costs plotted against the labor-hours.

C. Use a spreadsheet program to compute regression coefficients to describe the overhead cost equation.

D. Use the results of your regression analysis to develop an estimate of overhead costs assuming 350,000 labor-hours will be worked next month.

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