Question

1. HIGH-LOW METHOD The following information is available regarding the total manufacturing overhead costs of Paymore, Inc., for five months in 2012: Machine-Hours Mfg Overhead Costs 6,900 February March 5,000 April 6,300 $6,250 $5,375 $6,025 $7,975 $6,050 May 9,333 June 6,833 a. Using the high-low method, compute the following: 1. The variable element of overhead cost per machine-hour: per machine-hour ii. The fixed element of monthly overhead cost: $ b. Use the cost relationship determined in part a to estimate the total manufacturing overhead costs for July 2012, given that 7,250 machine-hours are scheduled.

Answer 1

Question a

i) In high low method, the variable cost is determined using the below formula:

Variable cost per unit = (Cost at the highest level - cost at the lowest level)/(Activity at the highest level- Activity at the lowest level)

In this example, the highest level of activity is 9,333 hours and lowest level of activity is 5,000 hours.

Variable cost per machine hour = (7,975-5,375)/(9,333-5,000)

Variable cost per machine hour = $0.60 per hour

ii) At 5,000 level,

Total cost =Total Variable cost + Total fixed cost

5,375 = (5,000*0.60)+Total fixed cost

Total fixed cost = 5,375-3,000

Fixed element of monthly overhead cost = $2,375

Question b

Total manufacturing cost = Variable cost + Fixed cost

Total manufacturing cost = (7,250*0.6)+2,375

Total manufacturing cost at 7,250 machine hours = $6,725