Question

Sawaya Co., Ltd., of Japan is a manufacturing company whose total factory overhead costs fluctuate considerably from year to year according to increases and decreases in the number of direct labor-hours worked in the factory. Total factory overhead costs at high and low levels of activity for recent years are given below: Direct labor-hours Total factory overhead costs Level of Activity Low High 67,800 90,400 $308,540 $360,520 The factory overhead costs above consist of indirect materials, rent, and maintenance. The company has analyzed these costs at the 67,800-hour level of activity as follows: Indirect materials (variable) Rent (fixed) Maintenance (mixed) $ 122,040 123,000 63,500 Total factory overhead costs $308,540 To have data available for planning, the company wants to break down the maintenance cost into its variable and fixed cost elements.

Answer 1

Requirement 1:- Estimate how much of the $360,520 factory overhead cost at the high level of activity consists of maintenance cost.

Solution:-

Maintenance cost at high level of activity

$74,800

Calculation of Maintenace cost

Total factory overhead cost = Indirect material + Rent + Maintenance Cost

$360,520 = (90,400 * $1.80) + $123,000 + Maintenance Cost

Maintenance Cost = $74,800

Indirect material cost per direct labor hour = Total direct materials / Level of Activity

Indirect material cost per direct labor hour = $122,040 / 67,800 = $1.80 per direct labor

Requirement 2:- Using the high-low method, estimate a cost formula for maintenance.

Solution:-

	Direct Lbaor hours	Maintenance cost
Low Level Activity	$67,800	$63,500
High Level Activity	$90,400	$74,800
Change	$22,600	$15,700
	(90,400 - 67,800)	(74,800 - 63,500)

Compute variable element of cost as per given.

Variable element of cost = Change in maintenance cost / Change in direct labor hours

Variable element of cost = $15,700 / $22,600

Variable element of cost = 0.695 per direct labor hour

Compute Fixed Cost Element

Fixed cost Element = Semi variable cost - Variable cost per unit * labor hours

Fixed cost Element = $74,800 - (0.695.. * 90,400)

Fixed cost Element = $74,800 - $62,800

Fixed cost Element = $12,000

Formula for maintainance cost

Y = $12,000 + $0.695 * X

Requirement 3:- What total factory overhead costs would you expect the company to incur at an operating level of 74,580 direct labor-hours?

Solution:-

Calculation of Total overehead factory costs

Total factory overhead cost = Indirect material + Rent + Maintenance Cost

Total factory overhead cost = ($0.695 * 74,580) + $123,000 + {$12,000 + (0.695 * 74,580)}

Total factory overhead cost = $51,833 + $123,000 + $63,833

Total factory overhead cost = $238,666

Thank you!!!