The following information is available regarding the total manufacturing overhead of Bursa Mfg. Co. for a recent four-month period.
Machine- Hours |
Manufacturing Overhead | |||||
January | 6,000 | $ | 320,000 | |||
February | 3,200 | 224,000 | ||||
March | 4,900 | 264,000 | ||||
April | 2,500 | 180,000 |
a-1. Use the high-low method to determine the variable element of manufacturing overhead costs per machine-hour.
a-2. Use the high-low method to determine the fixed element of monthly overhead cost.
b. Bursa expects machine-hours in May to equal 4,500. Use the cost relationships determined in part a to forecast May’s manufacturing overhead costs.
c. Suppose Bursa had used the cost relationships determined in part a to estimate the total manufacturing overhead expected for the months of February and March. By what amounts would Bursa have over- or underestimated these costs?
a-1. Variable manufacturing overhead cost per machine hour = ($320,000 - $180,000) / (6,000 - 2,500)
= $40
a-2. Fixed overhead = Total overhead - Variable overhead
= $320,000 - (6,000*$40)
= $80,000
b. Manufacturing overhead costs = Variable overhead + Fixed overhead
= (4,500 * $40) + $80,000
= $260,000
c. February Manufacturing overhead costs = Variable overhead + Fixed overhead
= (3,200 * $40) + $80,000
= $208,000
Underestimated costs = $224,000 - $208,000
= $16,000
March Manufacturing overhead costs = Variable overhead + Fixed overhead
= (4,900 * $40) + $80,000
= $276,000
Overestimated costs = $276,000 - $264,000
= $12,000
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