Question

Nova Company's total overhead cost at various levels of activity are presented below: Month April May June July Machine- Hours 50,000 40,000 60,000 70,000 Total Overhead Cost $ 187,300 $ 161,500 $ 213,100 $ 238,900 Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 40,000 machine-hour level of activity is: Utilities (variable) Supervisory salaries (fixed) Maintenance (mixed) Total overhead cost $ 56,000 45,000 60,500 $161,500 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 $238,900 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $238,900 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 Ya+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 45,000 machine-hours?

Answer 1

Answer1

COMPUTATION OF MAINTENANCE OF JULY

Total Overhead Cost	$238,900
less: Supervisory salaries	$45,000
less: Utilities [($56,000/40,000) * 70,000]	$98,000
Maintenance Cost in July	$95,900

Answer2

	Machine Hours	Maintenance Cost
High Level	70,000	$95,900
Low Level	40,000	$60,500
Change	30,000	$35,400
Variable Cost Element	1.18	35,400/30,000
Fixed Cost Element	13,300	95,900-(70,000*1.18)

Y= 13,300 + 1.18X (fixed + variable* variable rate)

Answer3

	Variable Cost per Machine hour	Fixed cost
Utilities Cost and Supervisory Salaries Cost	1.40	$45,000
Maintenance Cost	1.18	$13,300
Total Overhead Cost	2.58	$58,300

Y= 58,300+2.58X

Answer4

Total overhead cost = $58,300+(45,000*2.58)

=$58,300+$116,100

=$174,400

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