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		46,000		$	179,200
May		36,000		$	156,700
June		56,000		$	201,700
July		66,000		$	224,200

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)	$	43,200
Supervisory salaries (fixed)		61,000
Maintenance (mixed)		52,500
Total overhead cost	$	156,700

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 $224,200 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $224,200 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	Variable Utilities cost per Machine hour($43,200/36,000 hrs)	$                                  1.20
	Total Overhead Cost at 66,000 machine hours	$                           2,24,200
	Less:Utilities Costs(66,000*$1.20)	$                              79,200
	Less:Supervisory Salaries Costs	$                              61,000
	Maintaiance Costs	$                              84,000
2	Maintainance Costs
		Machine Hours	Maintainance Costs
	High level of activity	66,000	$84,000
	Low level of activity	36,000	$52,500
	Change	30,000	$31,500
	Variable cost per MHrs =$31,500 / 30,000 =$1.05 per machine hrs
	Fixed cost element =$84,000 - (66,000*$1.05)
	Y =$14,700 + $1.05X
3	Total Overhead Costs
		Machine Hours	Overhead Costs
	High level of activity	66,000	$2,24,200
	Low level of activity	36,000	$1,56,700
	Change	30,000	$67,500
	Variable cost per MHrs =$67,500 / 30,000 =$2.25 per machine hrs
	Fixed cost element =$224,200 - (66,000*$2.25)
	Y =$75,700 + $2.25X
4	Cost to be incurred at 41,000 machine hrs =$75,700 + $2.25*41,000 =$167,950