John Cruise Case

From the scatter diagram provide above, that the overhead cost function for the machine is Y = 36557+ 26.96X, X representing the machine hours. The variable overhead for Island Wheels Ltd for an additional machine hour will be $26.96 and the fixed cost is $36557. The R square being 0.902783345 shows the variation in overhead cost in machine hours is 90.28%. the average distance of the data points from the fit line is 2603.23 indicating that average difference of overhead costs from the linear is $2603.23.
2.3 Cost Prediction
2.3.1 Increased Labor Hour Prediction
If John Cruise was to raise the labor hours for Island Wheels Ltd to 8500 hours, then the overhead costs would stand at $81400 [(44000+(4.4*8500)] and $84432 [46862+(4.42* 8500)] when used High Low method and Regression analysis respectively.
2.3.2 Increased Machine Hour Prediction
If John Cruise was to raise the machine hours for Island Wheels
3.2 Activity Based Costing
Activity based costing is a new and advanced method of basing all direct and indirect costs that can be traced back to its original source. This method is frequently used when the pricing has no effect on sales, high production costs make it harder to make profits and harder for managers to understand the product cost and their reports. All these indicators point that Island Wheel Ltd might be in need of adopting this system of costing.
There are basically two steps of doing activity based costing. Initially, the total activity cost incurred has to be determined by finding out the key overhead activity costs. Secondly, allocation of overheads to each activity based on the identification of their cost