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ACCA Applied Knowledge · Management Accounting · Summarising and analysing data

A company uses regression analysis to model total production overhead as y = 12,000 + 4.5x, where x is machine hours. Budgeted activity for next month is 3,000 machine hours. What is the forecast overhead cost?

The forecast overhead is 25,500. Substitute 3,000 machine hours into the equation: variable cost is 4.5 multiplied by 3,000, which is 13,500, and adding the fixed element of 12,000 gives the total of 25,500.

  1. A25,500Correct
  2. B13,500
  3. C12,000
  4. D31,500

Explanation

Overhead = 12,000 + (4.5 x 3,000) = 12,000 + 13,500 = 25,500. The 13,500 option omits the fixed cost. The 31,500 option wrongly multiplies 4.5 by 3,000 and adds 18,000 instead of 12,000.

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