Question

Question 7 XYZ Company uses the formula y = a + bx to predict and analyze overhead costs. In the previous year, XYZ used $1,750 per month for the a factor and $0.35 for the b factor in applying overhead. XYZ has used direct labour hours in the past, but is wondering whether overhead behaviour is more closely associated with machine hours. The following data have been generated for consideration: Month Machine Hours Overhead Costs 1 471 $2,669 2 480 $3,025 3 398 $2,434 4 492 $2,897 5 503 $2,793 6 418 $2,791 Determine the fixed and variable values, using machine hours. (Round variable cost to 2 decimal places, e.g. 15.25 and fixed cost to O decimal places, e.g. 525). Fixed Cost $ Variable Cost per machine hour $ LINK TO TEXT If it is expected that the company will incur 850 machine hours the coming month, predict that month's overhead costs. (Round answer to o decimal places, e.g. 525). Month's overhead costs LINK TO TEXT

Please answer properly thanks

Answer 1

Solution

XYZ Company

Determination of fixed and variable values using the machine hours:

Using the high-low method, the variable component is computed by considering the OH costs of lowest level of activity and highest level of activity (machine hours).

Considering the lowest machine hours and corresponding overhead cost and the highest machine hours and the corresponding OH cost

Variable component = (2,793 – 2,434)/503 – 398) = $3.419

Fixed component is computed by substituting the variable component as follows,

Total cost = variable cost + fixed cost

At 503 MH level of activity, $2,793 = $3.419 x 503 + fixed cost

2,793 = 1,720 + fixed cost

Fixed cost = $1,073

To check, substitute $1,073 for 398 MH level of activity,

The total cost = $2,434

$2,434 = ($3.419 x 398) + $1,073

The total cost equals the computed cost of $2,434.

Hence,

Fixed Cost	$1,073
Variable Cost	$3.419 per MH

Predict the next month’s OH cost for expected level of activity of 850 MH –

Total cost, Y = a + bX

Variable cost per MH = b = $3.419

Number of MH = 850

Fixed cost, a = $1,073

Total cost at 850 MH = $1,073 + ($3.419 x 850)

Total OH cost = $3,979

Month’s overhead cost = $3,979

For April of the coming year predict overhead cost using,

1. Direct labor hours –

Fixed component, a = $1,750 per month

Variable component, b = $0.35 per DLH

Expected direct labor hours, X = 3,291

Substituting in the equation, Y = a + bX

Expected OH cost, Y = $1,750 + ($0.35 x 3,291) = $2,902

Overhead cost = $2,902

2. Machine hours –

Fixed component, a = $1,073

Variable component, b = $3.419

Expected Machine hours, X = 551

Total Overhead Cost, Y = $1,073 + ($3.419 x 551)

Expected overhead cost = $2,957

If April’s actual fixed OH costs are $1,087 and actual variable costs are $1,896, which activity base appears better?

Machine hours activity base appears better.

Explanation: the fixed overhead cost of $1,087 is closer to the budgeted estimate of $1,073. This indicates that machine hours activity base is more appropriate.