Question

PROBLEM 3-15 High-Low Method; Predicting Cost [LO1, LO2] Crosshill Company's total overhead costs at various levels of activity are presented below: Total Overhead Cost Month Machine Hours April. ..... May .......... June ........ July................... 70,000 60,000 80,000 90,000 $198,000 $174,000 $222,000 $246,000

Answer 1

Part 1

Maintenance cost in July

$153000

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

	Level of Activity
	60000 MH	90000 MH
Total factory overhead cost	$	174,000	$	246000
Deduct:
Utilities cost @ $0.80 per MH*		48000		72000
Supervisory salaries		21,000		21,000
Maintenance cost	$	105000	$	153000

$48000 ÷ 60,000 MHs = $0.80 per MH

Part 2

Y =

$41000

+

$1.60 X

High-low analysis of maintenance cost:

	Machine Hours	Maintenance Cost
High activity level	90,000	$ 153000
Low activity level	60,000	105000
Change	30,000	$ 48000

Variable cost per unit of activity:

Change in cost/ change in activity = 48000/30000 = 1.60 per MH

Total fixed cost:

Total maintenance cost at the low activity level	$	105000
Less the variable cost element       (40,000 MHs × $1.60 per MH)		64000
Fixed cost element	$	41000

Part 3

Y =

$62000

+

$2.40 X

Y = a + bX

a = fixed cost

b = variable cost

	Variable Rate per Machine-Hour	Fixed Cost
Maintenance cost	$ 1.60	$ 41000
Utilities cost	0.80
Supervisory salaries cost		21000
Totals	$ 2.40	$ 62000

Therefore

Y = $62000 + $2.40X

Part 4

Total overhead cost

$242000

Total overhead cost = 62000+(2.40*75000) = $242000