Question

Sawaya Co., Ltd., of Japan is a manufacturing company whose total factory overhead costs fluctuate considerably from year to year according to increases and decreases in the number of direct labor-hours worked in the factory. Total factory overhead costs at high and low levels of activity for recent years are given below:

	Level of Activity
	Low		High
Direct labor-hours		60,300		80,400
Total factory overhead costs	$	257,250	$	287,400

The factory overhead costs above consist of indirect materials, rent, and maintenance. The company has analyzed these costs at the 60,300-hour level of activity as follows:

Indirect materials (variable)	$	72,360
Rent (fixed)		138,000
Maintenance (mixed)		46,890
Total factory overhead costs	$	257,250

To have data available for planning, the company wants to break down the maintenance cost into its variable and fixed cost elements.

Required:

1.	Estimate how much of the $287,400 factory overhead cost at the high level of activity consists of maintenance cost. (Hint: To do this, it may be helpful to first determine how much of the $287,400 consists of indirect materials and rent. Think about the behavior of variable and fixed costs!) (Do not round intermediate calculations.)
	Maintenance cost at high level of activity:

     

2.	Using the high-low method, estimate a cost formula for maintenance. (Do not round intermediate calculations. Round "Variable cost element" to 2 decimal places.)

            

	Direct Labor-Hours Maintenance Cost High level of activity Low level of activity Change 0 $0 Variable cost element per DLH Fixed cost element

           
       

	Y = + X

3.	What total factory overhead costs would you expect the company to incur at an operating level of 66,330 direct labor-hours? (Do not round intermediate calculations.)

	Level of Activity
	Low		High
Direct labor-hours		60,300		80,400
Total factory overhead costs	$	257,250	$	287,400

The factory overhead costs above consist of indirect materials, rent, and maintenance. The company has analyzed these costs at the 60,300-hour level of activity as follows:

Indirect materials (variable)	$	72,360
Rent (fixed)		138,000
Maintenance (mixed)		46,890
Total factory overhead costs	$	257,250

To have data available for planning, the company wants to break down the maintenance cost into its variable and fixed cost elements.

Required:

1.	Estimate how much of the $287,400 factory overhead cost at the high level of activity consists of maintenance cost. (Hint: To do this, it may be helpful to first determine how much of the $287,400 consists of indirect materials and rent. Think about the behavior of variable and fixed costs!) (Do not round intermediate calculations.)

     

2.	Using the high-low method, estimate a cost formula for maintenance. (Do not round intermediate calculations. Round "Variable cost element" to 2 decimal places.)

     
       

3.	What total factory overhead costs would you expect the company to incur at an operating level of 66,330 direct labor-hours? (Do not round intermediate calculations.)

     

Answer 1

1		Direct Labor Hours	Maintenance Cost
	Highest Level of activity	80,400	$287,400
	Lowest Level of activity	60,300	$257,250
		20,100	$30,150
	Variable cost element	$1.50	per DLH
	Fixed cost element	$166,800
2	Y = $166,800 + $1.50X
3
	Total factory overhead costs incur at an operating level of 66,330 direct labor-hours
	Indirect materials (variable)	$79,596
	($72,360 x 66,330/60,300)
	Rent (fixed)	$138,000
	Maintenance (mixed)	$48,699
	$28,800 + ($46,890 - $28,800) x 66,330/60,300
	Total factory overhead costs	$266,295