John, a cost analyst for a manufacturing firm, was asked to estimate the overhead costs at one of the factories. He interviewed the supervisor and several workers there to get a feel of how overhead costs changed. His experience with the cost accounting system pointed to the use of machine hours as the cost driver for overhead items. Over the last 12 months, the total overhead costs were $103,918, out of which John determined $4,620 to be fixed cost per month and the rest variable cost. For the same period of time, 4,519 machine hours were incurred in that factory. The cost analyst, John, went back to the accounting information system to look for more relevant data. The following breakdown of the overhead costs and the associated machine hours over the same 12-month period was available:
Month
Overhead
Machine Hours
1
$ 7,102
203
2
8,620
319
3
9,120
425
4
7,092
289
5
7,965
388
6
9,641
471
7
10,421
512
8
8,834
443
9
6,935
262
10
8,520
371
11
10,342
494
12
9,326
342
Total
$103,918
4,519
John recently attended a workshop on statistical analysis. He was interested in applying the regression analysis to solve the relation between overhead costs and machine hours.
Required:
1. Determine the cost equation using the regression analysis and interpret the regression results.
2. Predict overhead costs when 400 machine hours are expected to be spent for next month.