Cornerstones of Managerial Accounting 6th Edition by Maryanne Mowen,Don Hansen ,Dan Heitger

Exercise 12

Method of Least Squares, Predicting Cost for Different Time Periods from the One Used to Develop a Cost Formula
Farnsworth Company has gathered data on its overhead activities and associated costs for the past 10 months. Tracy Heppler, a member of the controller's department, has convinced management that overhead costs can be better estimated and controlled if the fixed and variable components of each overhead activity are known. One such activity is receiving raw materials (unloading incoming goods, counting goods, and inspecting goods), which she believes is driven by the number of receiving orders. Ten months of data have been gathered for the receiving activity and are as follows:

Refer to the information for Farnsworth Company on the previous page. However, assume that Tracy has used the method of least squares on the receiving data and has gotten the following results:

Required:
1. Using the results from the method of least squares, prepare a cost formula for the receiving activity.
2. Using the formula from Requirement 1, what is the predicted cost of receiving for a month in which 1,450 receiving orders are processed? ( Note: Round your answer to the nearest dollar.)
3. Prepare a cost formula for the receiving activity for a quarter. Based on this formula, what is the predicted cost of receiving for a quarter in which 4,650 receiving orders are anticipated? Prepare a cost formula for the receiving activity for a year. Based on this formula, what is the predicted cost of receiving for a year in which 18,000 receiving orders are anticipated?