Paula Corporation Is Trying to Predict Its Manufacturing Overhead Costs

question 32

Essay

Paula Corporation is trying to predict its manufacturing overhead costs for the upcoming year; they are debating the use of the high-low method versus the use of regression analysis. They have gathered information about their manufacturing overhead costs in each of the past six months. A table containing their cost data and the associated machine hours in each month (the cost driver)follows.
The company performed a regression analysis using the above data and had the following results. (Note: the results are excerpts so not all of the regression analysis results are presented.)
Required:
a. What is the cost equation if the high-low method is used to estimate costs?
b. Using the high-low method, predict total manufacturing overhead costs if Paula Corporation uses 12,000 hours.
c. What is the cost equation if regression analysis is used to estimate costs (use the results from the regression analysis provided)?
d. Using the results from the regression analysis provided, predict total manufacturing overhead costs if Paula Corporation uses 12,000 hours.
e. Which method (high-low or regression analysis)is a better predictor of total manufacturing overhead costs? Why?

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Definitions:

Productive Input

Resources, such as labor, materials, and machinery, used in the production process to create goods or services.

Industrial Policy

Government policies aimed at improving the economic and competitive environment for businesses, often focusing on sectors believed to be significant for economic growth.

Regional Innovations

Novel products, processes, or techniques developed within a specific geographic area, contributing to its economic growth.

Economic Clustering

The phenomenon where businesses and industries tend to locate near each other in order to benefit from shared resources, knowledge, and markets.