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		730			1,358		$	102,771
2		720			1,409			103,758
3		675			1,522			109,913
4		740			1,445			108,318
5		780			1,589			116,295
6		745			1,569			114,589
7		750			1,399			106,962
8		725			1,316			102,080
9		715			1,459			106,359
10		800			1,550			113,037
11		680			1,290			100,355
12		710			1,604			113,072

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

In the given question of High-Low Method, we need to first evaluate Variable cost p.unit by using following Formula based on Machine-Hours.

Higest Activity Cost - $ 116295 & Lowest Activity Cost -$100355

Here instead of unit we use it Machine Hour.

Hence Related Highest Activity Machine Hours is 1589 hours & Lowest Activity Machine Hours is 1290 Hours

Variable Cost Per Unit = Highest Activity Cost-Lowest Activity Cost / Highest Activity Hours- Lowest Activity Hours

= $116295 - $100355 / 1589 hours- 1290 hours

= $ 15940/ 299 hours

= $ 53.3110 per Hour.

= $ 53.31 Per Hour (rounded to Two digit)

And Hence Fixed Cost = Lowest Activiy Cost -(Variable Cost Per Unit X Lowest Activity Hour)

= $100355 - ( $53.31 X 1290 Hours)

= $ 100355- $ 68769.90

= $31585.10

Answer 2 To derive the estimated monthly overhead cost we need to take the average cost per machine hour of last year. It is calculated as follows.

Month	Machine Hour	Overhead Cost
1	1358	102771
2	1409	103758
3	1522	109913
4	1445	108318
5	1589	116295
6	1569	114589
7	1399	106962
8	1316	102080
9	1459	106359
10	1550	113037
11	1290	100355
12	1604	113072
Total	17510	1297509
Average Rate of Overhead
= Total Overhead Cost for the Year / Total Machine Hours
=1297509/17510
74.10102798
= 74.1 (Rounded to Two Decimal)
Therefore Estimated Overhead Cost for this Year
=1500*74.10102798
112651.542
$112,651.50