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?

---

Definitions:

Saves

In finance, the amount of money that is set aside from income, typically in a savings account or other forms of secure investment.

Retirement Plan

A financial strategy that intends to provide individuals with income or resources during their retirement years.

Deposited

The action of placing money into a financial account or institution for safekeeping or to earn interest.

Compounded Annually

Interest calculation on the principal and the accumulated interest once a year.