The following information was taken from a computer printout generated with the least-squares method for use in estimating overhead costs: The cost formula is
A) Overhead = $5,700 - $45X
B) Overhead = $5,700 + $45X
C) Overhead = $5,700 + ($45 × 0.72)
D) Overhead = $5,700 × 0.72

Question

The following information was taken from a computer printout generated with the least-squares method for use in estimating overhead costs:  The cost formula is
A) Overhead = $5,700 - $45X 
B) Overhead = $5,700 + $45X 
C) Overhead = $5,700 + ($45 × 0.72) 
D) Overhead = $5,700 × 0.72

Quizplus · Accepted Answer

The cost formula generated through the least-squares method takes the form Y = a + bX, where Y is the total overhead cost, X is the level of activity, a is the fixed overhead cost, and b is the variable overhead cost per unit of activity. From the given information, we can identify the values of a and b as follows:

a = $5,700 (this is the intercept or the fixed cost component)
b = $45 (this is the slope or the variable cost per unit)

Therefore, the cost formula is: Overhead = $5,700 + $45X.

Option A is incorrect because it has a negative coefficient for X, which would mean that overhead decreases as the level of activity increases, which is counterintuitive.

Option C is incorrect because it uses a multiplier of 0.72, which is not supported by the given information.

Option D is incorrect because it only includes the fixed overhead cost and does not take into account the variable cost component.

The Following Information Was Taken from a Computer Printout Generated