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CMA Intermediate · Management Accounting · Forecasting, Budgeting and Budgetary Control

A Kolkata firm finds the regression of overhead cost on machine hours is Y = 20,000 + 8X, where X is machine hours. For 2,500 machine hours, what is the estimated overhead cost?

The estimated overhead is Rs 40,000. The regression line adds fixed cost of Rs 20,000 to variable cost of Rs 8 per hour times 2,500 hours, which is Rs 20,000. Using only one component gives Rs 20,000, which is incomplete.

  1. ARs 20,000
  2. BRs 40,000Correct
  3. CRs 22,500
  4. DRs 8,000

Explanation

Y = 20,000 + 8 x 2,500 = 20,000 + 20,000 = Rs 40,000. Rs 20,000 is only the fixed part or only the variable part. Rs 22,500 wrongly adds 2,500 hours to the fixed cost.

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