Utilities cost per machine hour = Total utilities cost at 37000 machine hour level of activity / 37000 = 44400 / 37000 | 1.20 |
Required 1 : | |
July | |
Total overhead cost | 238730 |
(-) Utilities cost ( 67000 * 1.20 ) | 80400 |
(-) Supervisory salaries | 63000 |
Maintenance cost | 95330 |
Required 2 : | ||
Machine hours | Maintenance cost | |
High level of activity (July) | 67000 | 95330 |
(-) Low level of activity (May) | 37000 | 59630 |
Difference | 30000 | 35700 |
Variable maintenance cost per machine hour = Difference in maintenance cost / Difference in Machine hours = 35700 / 30000 | 1.19 |
Now let us calculate the fixed maintenance cost using the information of high level of activity | |
Total maintenance cost = ( Machine hours * Variable maintenance cost per machine hours ) + Fixed maintenance cost | |
95330 = ( 67000 * 1.19 ) + Fixed maintenance cost | |
95330 = 79730 + Fixed maintenance cost | |
Fixed maintenance cost = 95330 - 79730 | 15600 |
Cost formula for maintenance : | |
Y = 15600 + 1.19 X |
Required 3 : | |
Cost formula for total overhead : | |
Y = ( 15600 + 63000 ) + ( 1.19 + 1.20 ) X | |
Y = 78600 + 2.39X |
Required 4 : | |
Let us calculate the Total overhead cost at an an activity level of 42000 machine hours using the cost formula derived in requirement 3 : | |
Y = 78600 + 2.39 * ( 42000 ) | 178980 |
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