Question

Adriana Corporation manufactures football equipment. In planning for next year, the managers want to understand the relation between activity and overhead costs. Discussions with the plant supervisor suggest that overhead seems to vary with labor-hours, machine-hours, or both. The following data were collected from last year's operations:

Month	Labor-Hours			Machine-Hours			Overhead Costs
1		730			1,354		$	102,672
2		720			1,400			103,841
3		670			1,525			109,998
4		735			1,459			108,270
5		770			1,584			116,165
6		745			1,588			114,486
7		730			1,400			106,963
8		720			1,309			102,087
9		715			1,459			106,404
10		795			1,551			113,024
11		680			1,298			104,420
12		700			1,608			117,595

Required:

a.

a. Use the high-low method to estimate the fixed and variable portions of overhead costs based on machine-hours. (Round "Variable cost" answer to 2 decimal places.)

b. Managers expect the plant to operate at a monthly average of 1,600 machine-hours next year. What are the estimated monthly overhead costs, assuming no inflation? (Round "Variable cost" answer to 2 decimal places.)

Answer 1

a.

Variable cost per machine hour = (Highest activity cost – Lowest activity cost)/(Highest activity machine hour – Lowest activity machine hour)

= (117,595 - 104,420)/(1,608 - 1,298)

= 13,175/310

= $42.5

Fixed cost = Highest activity cost – (Variable cost per machine hour x Highest activity machine hour)

= 117,595 - (42.5 x 1,608)

= 117,595 - 68,340

= $49,255

b.

Total cost when 1,600 machine hours used = Fixed cost + (Variable cost per machine hour x 1,600 )

= 49,255 + (42.5 x 1,600)

= 49,255 + 68,000

= $117,255

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