Question

Problem 5A-8 High-Low Method; Predicting Cost (L05-10) Nova Company's total overhead cost at various levels of activity are presented below: Month April May June July Machine- Hours 51,000 41,000 61,000 71,000 Total Overhead Cost $ 212,630 $ 187,330 $ 237,930 $ 263,230 Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 41,000 machine-hour level of activity is: Utilities (variable) Supervisory salaries (fixed) Maintenance (mixed) Total overhead cost $ 57,400 -70,000 59,930 $187,330 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 $263,230 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $263,230 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 Ya+bX. 4. What total overhead cost would you expect to be incurred at an activity level of 46,000 machine-hours? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required a Required 4 Estimate how much of the $263,230 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $263.230 consisted of utilities and supervisory salaries. Think about the behavior of variable and

Answer 1

utilities exp. Per MH ($) =	57400/41000 =	$1.4 per MH
1)Segregation of Total OH at 71000 MHs=	OH Costs $
Utility cost	71000*1.4	99400
Supervisory salaries (fixed)		70000
Maintenance cost (bal. fig.)		93830
total overhead costs		263230
2) segregation of maintenance costs into fixed and variable:
	Maintenance Costs $
Maintenance costs at 71000 MHs	93830
Maintenance costs at 41000 MHs	59930
Difference of MHs = 30000 MHs	33900
Variable Maintenance costs	33900/30000 =	1.13 per MH
Fixed Maintenance costs =	59930-(41000*1.13) =	13600
3) Maintenance costs (X) formula =	13600 + 1.13 X
4) Total overhead costs at 46000 MHs:
		OH Costs $
Utility costs (variable)	46000*1.4=	64400
Supervisory salaries (fixed)	70000=	70000
Maintenance cost (mixed)	13600 + (46000*1.13)=	65580
total overhead costs=		199980