Question

Nova Company’s total overhead cost at various levels of activity are presented below:

Month	Machine- Hours			Total Overhead Cost
April		54,000		$	197,500
May		44,000		$	172,000
June		64,000		$	223,000
July		74,000		$	248,500

Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 44,000 machine-hour level of activity is:

Utilities (variable)	$	61,600
Supervisory salaries (fixed)		44,000
Maintenance (mixed)		66,400
Total overhead cost	$	172,000

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 $248,500 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $248,500 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 Y = a + 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 49,000 machine-hours?

• Required 1

1. Estimate how much of the $248,500 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $248,500 consisted of utilities and supervisory salaries. Think about the behavior of variable and fixed costs.) (Do not round intermediate calculations.)

	Maintenance cost in July $130,500

• Required 2

2. Using the high-low method, estimate a cost formula for maintenance in the form Y = a + bX. (Do not round your intermediate calculations. Round the "Variable cost per unit" to 2 decimal places.)

	Y = + X

• Required 3

Express the company’s total overhead cost in the form Y = a + bX. (Do not round your intermediate calculations. Round the "Variable cost per unit" to 2 decimal places.)

	Variable Cost per Machine-Hour Fixed Cost Utilities cost Supervisory salaries cost Maintenance cost Total overhead cost $0.00 $0 Y = + X

• Required 4

What total overhead cost would you expect to be incurred at an activity level of 49,000 machine-hours? (Do not round intermediate calculations.)

	Total overhead costs

Answer 1

1)Answer is 100,900

	Level of Activity
	44000 MH	74000 MH
Total factory overhead cost	172,000.00	248,500.00
Deduct:
Utilities cost @ $1.40 per MH	61,600.00	103,600.00
Supervisory salaries	44,000.00	44,000.00
Maintenance cost	66,400.00	100,900.00

2)

	Machine Hours	Maintenance cost
High activity level	74,000.00	100,900.00
Low activity level	44,000.00	66,400.00
Change	30,000.00	34,500.00

Variable cost per unit = 34,500/30,000 = 1.15

Fixed cost = 66,400 - (44,000 x 1.15) = 15,800

Cost Formula = Y = $15,800 + 1.15X

3)

	Variable Rate per Machine-Hour	Fixed Cost
Maintenance cost	1.15	15,800.00
Utilities cost	1.40
Supervisory salaries		44,000.00
Totals	2.55	59,800.00

Cost Formula =Y = 59,800 + 2.55 X

4)

Fixed cost	59,800.00
Variable costs: $2.55 per MH × 49,000 MHs	124,950.00
Total overhead costs	184,750.00