Cost Accounting (14th Edition)

350 CHAPTER 10 DETERMINING HOW COSTS BEHAVE
Exhibit 10-4
Plot of Weekly Indirect
Manufacturing Labor
Costs and Machine-
Hours for Elegant Rugs
Indirect Manufacturing Labor Costs (Y)
$1,600
1,400
1,200
1,000
800
600
400
200
6
9
1
2
3 7
10
12
4
5 11
8
20 40 60 80 100
Cost Driver: Machine-Hours (X)
Step 6: Evaluate the cost driver of the estimated cost function. In this step, we describe
criteria for evaluating the cost driver of the estimated cost function. We do this after illustrating
the high-low method and regression analysis.
High-Low Method
The simplest form of quantitative analysis to “fit” a line to data points is the high-low
method. It uses only the highest and lowest observed values of the cost driver within the
relevant range and their respective costs to estimate the slope coefficient and the constant
of the cost function. It provides a first cut at understanding the relationship between a
cost driver and costs. We illustrate the high-low method using data from Exhibit 10-3.
Cost Driver:
Machine-Hours (X)
Indirect Manufacturing
Labor Costs (Y)
Highest observation of cost driver (week 6) 96 $1,456
Lowest observation of cost driver (week 8) 46 ƒƒƒ710
Difference 50 $ƒƒ746
The slope coefficient, b, is calculated as follows:
Slope coefficient =
To compute the constant, we can use either the highest or the lowest observation of the
cost driver. Both calculations yield the same answer because the solution technique solves
two linear equations with two unknowns, the slope coefficient and the constant. Because
At the highest observation of the cost driver, the constant, a, is calculated as follows:
Constant = $1,456 - ($14.92 per machine-hour * 96 machine-hours) = $23.68
And at the lowest observation of the cost driver,
Constant = $710 - ($14.92 per machine-hour * 46 machine-hours) = $23.68
Thus, the high-low estimate of the cost function is as follows:
y = a + bX
Difference between costs associated with highest
and lowest observations of the cost driver
Difference between highest and lowest
observations of the cost driver
= $746 , 50 machine-hours = $14.92 per machine-hour
y = a + bX
a = y - bX
y = $23.68 + ($14.92 per machine-hour * Number of machine-hours)