High Tech Manufacturing Inc., incurred total indirect manufacturing labor costs of $490,000. The company is labor intensive. Total labor hours during the period were 4,100. Using qualitative analysis, the manager and the management accountant determine that over the period the indirect manufacturing labor costs are mixed costs with only one cost driver-labor-hours. They separated the total indirect manufacturing labor costs into costs that are fixed ($120,000 based on 8,600 hours of labor) and costs that are variable ($370,000) based on the number of labor-hours used. The company has estimated 7,300 labor hours during the next period.
Which of the following represents the correct linear cost function?
A) y = $370,000 + $43.02X
B) y = $120,000 + $119.51X
C) y = $120,000 + $90.24X
D) y = $370,000 + $56.98X

Question

Quizplus · Accepted Answer

Fixed costs are given at $120,000 based on 8,600 hours of labor; variable costs are $370,000 during the period divided by 4,100 labor hours during the period = $90.24 variable cost per labor hour.