Question

Crosshill Company's total overhead costs at various levels of activity are presented below: Month April May June July Machine- Hours 45,000 35,000 55,000 65,000 Total Overhead Cost $175,050 $ 151,550 $198,550 $ 222,050 Assume that the overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 35,000-machine-hour level of activity in May is as follows: Utilities (variable) Supervisory salaries (fixed) Maintenance (mixed) 42,000 55,000 54,550 Total overhead cost $ 151,550 The company wants to break down the maintenance cost into its variable and fixed cost elements.

Answer 1

3	Calculation of company's overhead cost in the form of y=a+bx	4
		Variable Rate per Machine-Hour	Fixed Cost
	Utilities cost	$1.20
	Supervisory salaries cost		55000
	Maintenance cost	$1.15	14300
	Totals	2.35	69300
	working note:
a.	variable cost per machine hour of utilities:
	= $42000/35000 hours
	= 1.2 per machine hour
b.	In case of supervasory salaries:
	all costs are fixed
c.	In case of maintence:
	both variable and fixed cost are mixed.
	so,
i.	calculation of maintance cost at 45000 machine hours level:
	total overhead		$175,050
	less: utilities ( variable)	(45000 hours *$ 1.2 per hour)	$54,000
	less: supervasory salaries	(all fixed)	$55,000
	maintence cost	( mixed)	$66,050
ii.	calculation of portion of variable cost per unit in maintance cost:
	= change in cost / change in machine hours
	= ($66050-$54550)/(45000 hours-35000 hours)
	= $11500/10000 hours
	= $ 1.15 per machine hours
iii.	calculation of fixed cost in maintence cost :
	=total maintence cost - variable cost portion in maintance cost
	= $66050-45000*1.15
	= $66050-$51750
	= $14300
4	calculation of tatal overhead cost incurred at an activity level of 40000 machine hours
	utility cost	( 40000 hours*$1.2 per hour)	$48,000
	supervasory cost		$55,000
	maintence cost:
	variable cost	( 40000 hours *$1.15 per hour)	$46,000
	fixed cost		$14,300
	total cost		$163,300