Question

Nova Company’s total overhead cost at various levels of activity are presented below:

Month	Machine- Hours			Total Overhead Cost
April		52,000		$	182,640
May		42,000		$	158,940
June		62,000		$	206,340
July		72,000		$	230,040

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)	$	54,600
Supervisory salaries (fixed)		44,000
Maintenance (mixed)		60,340
Total overhead cost	$	158,940

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 $230,040 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $230,040 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

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Please find below the answer
Statementshowing Computations
Month	Machine hours	Total Overhead Cost	Utilities at 1.30 per unit	Supervisory salaries	Maintenance = Total - utilities - Sal
April	52,000.00	182,640.00	67,600.00	44,000.00	71,040.00
May	42,000.00	158,940.00	54,600.00	44,000.00	60,340.00
June	62,000.00	206,340.00	80,600.00	44,000.00	81,740.00
July	72,000.00	230,040.00	93,600.00	44,000.00	92,440.00
1) 92,440
2)
Cost at highest level of activity	92,440.00
Cost at Lowest level of activity	60,340.00
Highest level of activity	72,000.00
Lowest Level of activity	42,000.00
Variable cost per unit = (92440- 60340)/(72000 - 42000)
Variable cost per unit = 32,100/30,000
Variable cost per unit = $1.07
Fixed Costs = 60340- 42000*1.07
Fixed Costs = $15,400
Y = 15,400 + 1.07x
3) Y = 59,400 + 2.37x
Since fixed cost = 44000 + 15400
Variable cost = 1.30 + 1.07
4) total overhead cost = 59,400 + 47000 * 2.37 = $170,790