Question

Question 1

• Time: 10 minutes
• Total: 5 marks

Dundar Mifflin makes electronic products for the RCMP. The following data is for the first six months:

           

	Direct Labor Hours	Manufacturing Overhead
January	45,000	$295,000
February	59,900	$307,575
March	57,000	$323,000
April	58,000	$320,000
May	27,800	$158,600
June	29,000	$152,500

Required:

1. Use the high-low method to estimate the cost formula                           (3 marks)

2. Estimate the total overhead cost at an activity level of 41,000 machine hours, using the separate estimates you obtained for its components.                                                 (2 marks)

Answer 1

Answer a.

Highest Activity:

Manufacturing overhead = $307,575
Direct labor hours = 59,900

Lowest Activity:

Manufacturing overhead = $158,600
Direct labor hours = 27,800

Variable cost per direct labor hour = (Manufacturing overhead at highest activity - Manufacturing overhead at lowest activity) / (Direct labor hours at highest activity - Direct labor hours at lowest activity)
Variable cost per direct labor hour = ($307,575 - $158,600) / (59,900 - 27,800)
Variable cost per direct labor hour = $4.64

Fixed cost = Manufacturing overhead at highest activity - Variable cost per direct labor hour * Direct labor hours at highest activity
Fixed cost = $307,575 - $4.64 * 59,900
Fixed cost = $29,639

Manufacturing overhead = Variable cost per direct labor hour * Direct labor hours + Fixed cost
Manufacturing overhead = $4.64 * Direct labor hours + $29,639

Answer b.

Manufacturing overhead = $4.64 * Direct labor hours + $29,639
Manufacturing overhead = $4.64 * 41,000 + $29,639
Manufacturing overhead = $219,879