Question

Nova Company’s total overhead

Nova Company's total overhead cost at various levels of activity are presented below! Month April May June July Total Machine - Overhead Hours Cost 47,000 $187,050 37,000 $159,550 57,000 $214,550 67,000 $242,050 Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 37,000 machine-hour level of activity is: Utilities (variable) Supervisory salaries (fixed) Maintenance (mixed) Total overhead cost $ 55,500 40,000 64,050 $159,550 Nova Company's management wants to break down the maintenance cost into its variable and fixed cost elements Required:

Answer 1

Solution

Nova Company

1. Estimation of maintenance cost for July:

Total overhead cost in July = $242,050

Number of machine hours in July = 67,000

Variable costs –

Utilities – ($55,500/37,000MH) x 67,000 MH = $100,500

Fixed costs –

Supervisory salaries    $40,000

Total of variable and fixed costs in July = 140,500

Maintenance cost in July = 242,050 – 140,500 = $101,550

2. Estimation of cost formula in the form Y = a + bX, using the high-low method:

Variable cost per MH = (difference between higher cost and lower cost)/difference in activity levels

First step would be to estimate the maintenance cost for each month.

April –

Total OH cost     $187,050

Less: fixed           $40,000

Less: variable      $70,500

Maintenance cost $76,550

For May -

Total OH cost     $159,550

Less: fixed           $40,000

Less: variable      55,500

Maintenance cost            $64,050

For June –

Total OH cost     $214,550

Less: fixed           $40,000

Less: variable      $85,500

Maintenance cost            $89,050

For July -

Total overhead cost in July = $242,050

Number of machine hours in July = 67,000

Variable costs –

Utilities – ($55,500/37,000MH) x 67,000 MH = $100,500

Fixed costs –

Supervisory salaries    $40,000

Total of variable and fixed costs in July = 140,500

Maintenance cost in July = 242,050 – 140,500 = $101,550

Considering the high low months of July and May –

Variable cost per MH = (101,550 – 64,050)/(67,000 – 37,000)

= 37,500/30,000 = $1.25 per MH

Variable cost in July = $1.25 x 67,000 = $83,750

Fixed cost = 101,550 - 83,750 = $17,800

Hence, cost formula for Maintenance cost, Y = $17,800 + $1.25X

Where, Y – total cost; b = fixed cost; a – variable cost per unit; X – activity level/units/hours

3. Total overhead cost in Y = b + aX cost formula.

	Variable Cost per Machine Hour	Fixed Cost	fix
Utilities Cost	$1.50
Supervisory salaries cost		$40,000
Maintenance cost	$1.25	$17,800
Total Overhead cost	$2.75	$57,800
Y	=	$57,800 + $2.75X

4. Determination of the total overhead cost that is expected to incur on an activity level of 42,000 machine hours –

Using the cost formula, Y = $57,800 + $2.75 X, where Y = total cost; X – machine hours

Total cost = $57,800 + $2.75 x 42,000 = 173,300

Hence, total overhead cost expected to incur on activity level of 42,000 machine hours = $173,300