Question

Adriana Corporation manufactures football equipment. In planning for next year, the managers want to understand the relation between activity and overhead costs. Discussions with the plant supervisor suggest that overhead seems to vary with labor-hours, machine-hours, or both. The following data were collected from last year's operations.

Month	Labor-Hours			Machine-Hours			Overhead Costs
1		725			1,347		$	102,692
2		710			1,404			103,871
3		675			1,524			109,838
4		740			1,458			108,308
5		785			1,595			116,214
6		755			1,570			114,440
7		730			1,385			107,092
8		730			1,304			102,152
9		710			1,462			106,379
10		800			1,545			113,027
11		670			1,288			102,996
12		705			1,610			116,520

Required:

a. Use the high-low method to estimate the fixed and variable portions of overhead costs based on machine-hours.

b. Managers expect the plant to operate at a monthly average of 1,500 machine-hours next year. What are the estimated monthly overhead costs, assuming no inflation?

Answer 1

Answer 1

Given:

	Lowest range	Highest range
Cost	$      102,996	$       116,520
Hours	1,288	1,610

As per High Low Method,
Variable cost per hour =	Change in costs / change in hours
Variable cost per hour =	($ 116520 - $ 102996) / (1610 - 1288)
Variable cost per hour =	$ 13524 / 322
Variable cost per hour =	$ 42
Fixed Cost =	Total Cost - Variable Cost
Fixed Cost =	Total Cost - (Variable Cost per hour * hours)
Fixed Cost =	$ 116520 - ($ 42 * 1610)
Fixed Cost =	$ 48,900

Answer 2

Cost = (1500 * $ 42) + $ 48,900

= $ 111,900

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