Question

Crosshill Company's total overhead costs at various levels of activity are presented below: Month April May June July Machine- Hours 52,000 42,000 62,000 72,000 Total Overhead Cost $204,360 $180,060 $228,660 $252,960 Assume that the overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 42,000-machine-hour level of activity in May is as follows: $ Utilities (variable) Supervisory salaries (fixed) Maintenance (mixed) 54,600 60,000 65,460 Total overhead cost $ 180,060 The company wants to break down the maintenance cost into its variable and fixed cost elements. Required: 1. Estimate how much of the $252,960 of overhead cost in July was maintenance cost. (Hint: To do this, first determine how much of the $252,960 consisted of utilities and supervisory salaries. Think about the behaviour of variable and fixed costs within the relevant range.) (Do not round intermediate calculations.) Maintenance cost in July

Answer 1

Solution:

1.)Maintenance cost in July: $99,360

Maintenance cost at the 72,000 machine hour level of activity can be isolated as follows:

Level of activity

	42,000 MH	72,000 MH
Total factory overhead cost	$$180,060	$252,960
Deduct:
Utilities cost @ $1.30 per MH	$54,600	$93,600
Supervisory salaries	$60,000	$60,000
Maintenance cost	$65,460	$99,360

* $54,600 ÷ 42,000 MHrs. = $1.30 per MH

2. High - low analysis of maintenance cost:

	Machine Hours	Maintenance cost
High activity level	72,000 hrs.	$99,360
Low activity level	42,000 hrs.	$65,460
Change	30,000 hrs.	$33,900
Variable cost element	$1.03	per MH
Fixed cost element	$22,200

Y =

$22,200

+

$1.03

X

Variable cost element:

Change in cost / Change in activity

=$33,900 /33,000 MHs = $1.027 or $1.03

Total fixed cost:

Total maintenance cost at the low activity level	$65,460
Less: the variable cost element (42000 ×$1.03 per MH)	$43,260
Fixed cost element	$22,200

3.)

	Variable cost per unit
	Machine - Hour	Fixed Cost
Utilities cost	$1.30
Supervisory salaries cost		$60,000
Maintenance cost	$1.03	$22,200
Totals	$2.33	$82,200

Y =

$82,200

+

$2.33

x

4.)

Total overhead costs =$191,710

Fixed cost	$82,200
Variable cost ($2.33 per MH × 47,000 MHs)	$109,510
Total overhead costs	$191,710