The Johnson Company Is Trying to Find an Appropriate Allocation

question 104

Essay

The Johnson Company is trying to find an appropriate allocation base for factory overhead. Presented are five months of data: $$\begin{array} { | c | c | c | c | } \hline \text { Month } & \text { Direct Labor Hours } & \text { Machine Hours } & \text { Factory Overhead } \\\hline \text { June } & 10 & 3 & \$ 45 \\\hline \text { July } & 20 & 5 & 75 \\\hline \text { August } & 15 & 4 & 70 \\\hline \text { September } & 30 & 5 & 130 \\\hline \text { October } & 25 & 3 & 80 \\\hline\end{array}$$ $$r = \frac { \sum ( X - X ) ( Y - Y ) } { \left( \sum ( X - X ) ^ { 2 } \sum ( Y - Y ) ^ { 2 } \right) ^ { 5 } }$$
Required:
a.Calculate the correlation coefficient between factory overhead and direct labor hours.
b.Calculate the correlation coefficient between factory overhead and machine hours.
c.Should Johnson Company use direct labor hours or machine hours for their allocation base for factory overhead? Why?

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