Question

Nova Company's total overhead cost at various levels of activity are presented below: Month April May June July Machine- Hours 46,000 36,000 56,000 66,000 Total Overhead Cost $ 186,020 $ 161,820 $ 210,220 $ 234, 420 Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 36,000 machine-hour level of activity is: Utilities (variable) Supervisory salaries (fixed) Maintenance (mixed) Total overhead cost $ 43, 200 60,000 58,620 $ 161, 820 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 $234,420 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $234,420 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 41,000 machine-hours?

Answer 1

1
Total overhead cost	234420
Less: Utilities	79200	=43200/36000*66000
Less: Supervisory salaries	60000
Maintenance cost in July	95220
2
	Machine hours	Maintenance cost
High level	66000	95220
Low level	36000	58620
Change	30000	36600
Variable cost element	1.22	=36600/30000
Fixed cost element	14700	=95220-(66000*1.22)
Y = 14700 + 1.22 X
3
	Variable cost per machine hour	Fixed cost
Utilities cost	1.20
Supervisory salaries cost		60000
Maintenance cost	1.22	14700
Total overhead cost	2.42	74700
Y = 74700 + 2.42 X
4
Total overhead costs	173920	=74700+(41000*2.42)