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:

Month	Machine- Hours			Total Overhead Cost
April		52,000		$	207,440
May		42,000		$	181,740
June		62,000		$	233,140
July		72,000		$	258,840

Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 42,000 machine-hour level of activity is:

Utilities (variable)	$	63,000
Supervisory salaries (fixed)		56,000
Maintenance (mixed)		62,740
Total overhead cost	$	181,740

Nova Company’s management wants to break down the maintenance cost into its variable and fixed cost elements.

Required:

1. Estimate how much of the $258,840 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $258,840 consisted of utilities and supervisory salaries. Think about the behavior of variable and fixed costs.)

2. Using the high-low method, estimate a cost formula for maintenance in the form Y = a + bX.

3. Express the company’s total overhead cost in the form Y = a + bX.

4. What total overhead cost would you expect to be incurred at an activity level of 47,000 machine-hours?

Answer 1

1)	Utilities	(63000/42000)*72000			108000
	Supervisory Salaries				56,000
	Maintenance (balancing figure)				94,840
	Total overhead cost				258,840
	Maintenance cost in july			94,840
2)	Estimating formula for maintenance cot
			MH's	cost
	high		72,000	94,840
	low		42,000	62,740
	Difference		30,000	32,100
	Variable cost per unit = 32100/30000
			1.07
	Fixed cost = 94840-72000*1.07
		17800
	Cost formula
	Y=	17,800	+	1.07	X
3)	Companys total overhead cost
				Variable	Fixed
	Utilities			1.3
	Supervisory salaries				56,000
	Maintenance cost			1.07	17,800
	total			2.37	73800
	cost formula
	Y=	73,800	+	2.37	X
4)	total overhead cost
	Y=	73,800	+	2.37	X
	so
	fixed cost				73,800
	Variable cost (47000*2.37)				99540
	total overhead cost				173,340	answer