Question

PROBLEM 5A-8 High-Low Method; Predicting Cost LO5-10 Nova Company's total overhead cost at various levels of activity are presented below: Total Overhead Machine- Month Cost Hours April..... May $198,000 $174,000 $222,000 $246,000 70,000 60,000 ... .. June. 80,000 July 90,000

Answer 1

1.Maintenance cost at the 90,000 machine-hour level of activity can be calculated as follows:

Level of Activity 60,000 90,000

MH MH

Total factory overhead cost $174,000 $246,000

Less: Utilities cost @ $0.8 per MH $48,000 $72,000

Supervisory salaries $21,000 $21,000

__________ _________

Maintenance cost $105,000 $153,000

Utilities Cost per machine hour = $48,000 ÷ 60,000 MHs = $0.8 per MH

Maintenance cost for July is $153,000.

2.High-low analysis of maintenance cost:

Machine Maintenance

Hours Cost

High activity level 90,000 $153,000

Low activity level 60,000 $105,000

Change 30,000 $48,000

Variable cost per unit of activity:

Change in cost/Change in Hours

= $48,000/30,000MH = $1.6 per MH

Total fixed cost:

Total maintenance cost at the low activity level $105,000

Less: Variable cost element

(60,000 MHs × $1.6 per MH) ($96,000)

Fixed cost element $9,000

Thus, the cost formula is $9,000 per month plus $1.6 per machine-hour or

Y = $19,000 + $1.6X

3. Variable Rate per Fixed Cost

Machine-Hour

Maintenance cost $1.6 $9,000

Utilities cost $0.8   

Supervisory salaries cost $21,000

Totals $2.4 $30,00

Thus, the cost formula is: Y = $30,00 + $2.4X.

4.Total overhead cost at an activity level of 75,000 machine-hours:

Fixed cost $30,000   

Variable costs: $2.4 per MH*45,000 MHs $180,000

_________

Total overhead costs $210,000