Nova Company’s total overhead cost at various levels of activity are presented below:
Month | Machine- Hours |
Total Overhead Cost |
|||
April | 52,000 | $ | 178,520 | ||
May | 42,000 | $ | 155,920 | ||
June | 62,000 | $ | 201,120 | ||
July | 72,000 | $ | 223,720 | ||
Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 42,000 machine-hour level of activity is:
Utilities (variable) | $ | 50,400 |
Supervisory salaries (fixed) | 42,000 | |
Maintenance (mixed) | 63,520 | |
Total overhead cost | $ | 155,920 |
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 $223,720 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $223,720 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 47,000 machine-hours?
1 | Maintainance Cost Estimation: | ||
Total Overhead Cost | 2,23,720 | ||
Less: | |||
Utilities-Variable(50400/42000*72000) | 86,400 | ||
Supevisior-Fixed | 42,000 | ||
Maintainance Cost-Balance | 95,320 | ||
2 | Machine Hours | Cost | |
High Level | 72,000 | 2,23,720 | |
Low Level | 42,000 | 1,55,920 | |
Differential | 30,000 | 67,800 | |
A | B | ||
Variable Cost Per MH: | 67800/30000 | ||
(B/A) | 2.26 | ||
Fixed Cost: | Total Cost: | ||
High Level | 2,23,720 | ||
Less: Variable Cost | 1,62,720 | (72000*2.26) | |
Fixed Cost | 61,000 | ||
3 | Y=61000+b (2.26) | ||
4 | Machine Hours 47000: | ||
Variable Cost(47000*2.26) | 1,06,220 | ||
Fixed Cost | 61,000 | ||
Total | 1,67,220 | ||
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