Nova Company’s total overhead cost at various levels of activity are presented below: Month Machine- Hours Total Overhead Cost April 47,000 $ 180,200 May 37,000 $ 156,200 June 57,000 $ 204,200 July 67,000 $ 228,200 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) $ 48,100 Supervisory salaries (fixed) 55,000 Maintenance (mixed) 53,100 Total overhead cost $ 156,200 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 $228,200 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $228,200 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 42,000 machine-hours?
Month | Machine Hours | Overhead Cost | ||||||
April | 47,000 | $180,200 | ||||||
May | 37,000 | $156,200 | ||||||
June | 57,000 | $204,200 | ||||||
July | 67,000 | $228,200 | ||||||
37000 | Variable cost(Utilities) | $48,100 | ||||||
Fixed cost(supervisor salary) | $55,000 | |||||||
Maint. Cost(mixed) | $53,100 | |||||||
Total overhead | $156,200 | |||||||
Requirement-1 | Maint. Cost in July = 228,200 | |||||||
Machine hours = 67,000 | ||||||||
Utilities cost(variable) | $87,100 | (48,100/37,000*67,000) | ||||||
Fixed Cost(supervisor salary) | $55,000 | |||||||
$142,100 | ||||||||
hence, remaining cost is maintenance cost | $86,100 | (228,200-142,100) | ||||||
Requirement -2 | Variable cost per unit as per high low method = | (Highest Activity Cost - Lowest Activity Cost)/(Highest activity units - Lowest activity units) | ||||||
(228,200-156,200)/(67,000-37,000) | ||||||||
Variable cost per unit as per high low method = | 2.4 | |||||||
Fixed cost = Highest activity cost – (Variable cost per unit x Highest activity units) | ||||||||
Fixed cost = 228,200 - (2.4*67000) | ||||||||
Fixed cost = 228,200 - 160,800 | ||||||||
Fixed cost = $ 67,400 | ||||||||
Y = 67,400 + 2.40*X | ||||||||
Where Y = total cost | ||||||||
X = Activity hours | ||||||||
Requirement -3 | Alternative approach | Differencial | Variable portion at 37,000 level | Fixed portion | ||||
Activity level -> | 37000 | 67000 | 30000 | |||||
utility cost | $48,100 | $87,100 | 39000 | 1.3 | 48100 | 0 | ||
(87,100-48,100) | (39,000/30,000) | (1.3*37,000) | ||||||
maint | $53,100 | $86,100 | 33000 | 1.1 | 40700 | $12,400 | ||
(86,100-53,100) | (33,000/30,000) | (1.1*37,000) | (53100-40,700) | |||||
Hence total fixed overhead = 55,000+12,400 | ||||||||
Hence total fixed overhead = 55,000+12,400 | ||||||||
Hence total fixed overhead = 67,400 | ||||||||
Y = 67,400 + 2.40*X | ||||||||
Where Y = total cost | ||||||||
X = Activity hours | ||||||||
Requirement -4 | Y = 67,400 + 2.40*X | |||||||
Y = 67,400 + 2.40*42,000 | ||||||||
Y = 67,400 + 100,800 | ||||||||
Y = $ 168,200 | ||||||||
Hence, total cost = 168,200 |
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