Month Direct Labour Hours Electicity expense

Jan 34,000 $ 640

Feb 30,000 $ 620
Mar 34,000 $ 620
Apr 39,000 $ 590
May 42,000 $ 500
Jun 32,000 $ 530
Jul 26,000 $ 500
Aug 26,000 $ 500
Sep 31,000 $ 530
Oct 35,000 $ 550
Nov 43,000 $ 580
Dec 48,000 $ 680
Total 420,000 $ 6,840
Monthly Average 35,000 $ 570

High-low method
Activity Level Expense
High 48,000 $ 680
Low 26,000 $ 500
Difference 22,000 $ 180

Variable rate = Expense per direct labour hour

Activity Level

Variable rate = 180 per direct labour hour

22,000

Variable rate = $ 0.00818 per direct labour hour

High Low
Total expense $ 680 $ 500
Variable expense $ 393 $ 213
Fixed expense $ 287 $ 287
 $800

$700

$600

$500
Axis Title

$400

$300

$200

$100

$-
- 10,000 20,000 30,000 40,000 50,000 60,000
Axis Title

Electicity expense Linear (Electicity expense)

Statistical scattergraph method

Average monthly
Average monthly expense - Fixed element = variable element of
expense
Average monthly
570 - 440 = variable element of
expense
Average monthly
$ 130 variable element of
expense

Average monthly variable element of expense = Variable cost per direct

Average monthly direct labour hours labour hour

$ 130 = Variable cost per direct

35,000 hours labour hour

$ 0.0037 Variable cost per direct

labour hour
Method of Least Squares

It finds the equation of the straight line (line of best fit) which has the general form y = a +bx

where;
y = dependent variable = total cost x = independent variable = level of activity
a = intercept of line on y axis = fixed cost b = gradient of line = variable cost per unit

Difference
Difference
from
from
Electicity average of
Month Direct Labour Hours average of (x - )2 (y - )2 (x - ) * (y - ) xy x2
expense $570
35,000
electricity
hours
expense
x x- y y- (2)2 (4)2 (2) * (4) (1) * (3) (1)2
(1) (2) (3) (4) (5) (6) (7) (8) (9)
Jan 34,000 (1,000) $ 640 70 1,000,000 $ 4,900 (70,000) 21,760,000 1,156,000,000
Feb 30,000 (5,000) $ 620 50 25,000,000 $ 2,500 (250,000) 18,600,000 900,000,000
Mar 34,000 (1,000) $ 620 50 1,000,000 $ 2,500 (50,000) 21,080,000 1,156,000,000
Apr 39,000 4,000 $ 590 20 16,000,000 $ 400 80,000 23,010,000 1,521,000,000
May 42,000 7,000 $ 500 (70) 49,000,000 $ 4,900 (490,000) 21,000,000 1,764,000,000
Jun 32,000 (3,000) $ 530 (40) 9,000,000 $ 1,600 120,000 16,960,000 1,024,000,000
Jul 26,000 (9,000) $ 500 (70) 81,000,000 $ 4,900 630,000 13,000,000 676,000,000
Aug 26,000 (9,000) $ 500 (70) 81,000,000 $ 4,900 630,000 13,000,000 676,000,000
Sep 31,000 (4,000) $ 530 (40) 16,000,000 $ 1,600 160,000 16,430,000 961,000,000
Oct 35,000 - $ 550 (20) - $ 400 - 19,250,000 1,225,000,000
Nov 43,000 8,000 $ 580 10 64,000,000 $ 100 80,000 24,940,000 1,849,000,000
Dec 48,000 13,000 $ 680 110 169,000,000 $ 12,100 1,430,000 32,640,000 2,304,000,000
Total 420,000 - $ 6,840 $ - 512,000,000 $ 40,800 $ 2,270,000 241,670,000 15,212,000,000
Monthly Average 35,000 $ 570

b= Σ (x - ) * (y - )
Σ (x - )2
b= $ 2,270,000
512,000,000
b= $ 0.0044 per direct labour hour
 y = a + bx
$ 570 = a + =($0.0044)*(35,000)
$ 570 = a + $ 154.00
a = $ 416 Fixed elelment of electricity expense

b= nΣxy – ΣxΣy a= Σy - bΣx

2 2
nΣx – (Σx) n n
b= (12*241,670,000) - (420,000*6,840) a= 6840 - (0.0044)*(420,000)
2
(12*15,212,000,000) - (420,000) 12 12
b= $ 27,240,000 a= 570 - 154
6,144,000,000 a= $ 416 Fixed elelment of electricity expense
b= $ 0.0044 per direct labour hour

Coefficient of correlation, denoted r, is a measure of the extent to which two variables are related linearly.

When r=0, there is no correlation.

When r=±1, the correlation is perfect.
r=+1, the correlation is positive, which means that the dependent variable, y, increases as the independent variable, x, increases, and the regression line slopes
upward to the right.
r=-1, the correlation is negative or inverse, which means that the dependent variable, y, decreases as the independent variable, x, increases, and the regression
line slopes downward to the right.

Coefficient of determiniation, r2, is found by squaring the Coefficient of correlation.

r= Σ(x - ) * (y - )
√[Σ(x - )2 * Σ(y - )2]
r= 2,270,000
√[512,000,000*40,800]
r= +0.49666
r 2= 0.24667
Applied factory overhead - over or underapplied and variance analysis

Expense Fixed Variable Total

Estimated Factory Overhead 125,000 175,000 300,000

Estimated Fixed Factory Overhead = 125,000 = 0.625

Estimated Direct Labour Hours 200,000

Estimated Variable Factory Overhead = 175,000 = 0.875

Estimated Direct Labour Hours 200,000

Estimated Factory Overhead = 300,000 = 1.500

Estimated Direct Labour Hours 200,000

For example, labour hour worked during the period 189,000 hours

Applied factory overhead will be 283,500

(189,000 * 1.500)

Whereas, actual factory overhead is 292,000

Factory overhead - underapplied Unfavourable 8,500

This can be further broken into Spending variances and Idle capacity variances:

Spending variance
It is the difference between the actual factory overhead incurred and the budget
allowance estimated for the capacity utilized, i.e. for the actual activity of
189,000 direct labour hours worked

Actual Total FOH 292,000

Less: Estimated Fixed Factory Overhead 125,000
Actual Variable FOH 167,000
Variable FOH applied (189,000 *0.875) 165,375
Spending variance - unfavourable 1,625
Idle variance

Actual Total FOH 292,000

Spending variance - unfavourable 1,625
Budget allowance (based on capacity utilized) 290,375
Applied factory overhead will be (189,000 * 1.500) 283,500
Idle variance - unfavourable 6,875