Question

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

Month	Machine- Hours			Total Overhead Cost
April		55,000		$	183,500
May		45,000		$	160,500
June		65,000		$	206,500
July		75,000		$	229,500

Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 45,000 machine-hour level of activity is:

Utilities (variable)	$	54,000
Supervisory salaries (fixed)		40,000
Maintenance (mixed)		66,500
Total overhead cost	$	160,500

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 $229,500 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $229,500 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 50,000 machine-hours?

• Required 1

Estimate how much of the $229,500 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $229,500 consisted of utilities and supervisory salaries. Think about the behavior of variable and fixed costs.) (Do not round intermediate calculations.)

• Required 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

Y=_____ + ______ X

• Required 4

What total overhead cost would you expect to be incurred at an activity level of 50,000 machine-hours? (Do not round intermediate calculations.)

Total Overhead Cost =

Answer 1

1
Total overhead cost	229500
Less: Utilities	90000	=54000/45000*75000
Less: Supervisory salaries	40000
Maintenance cost in July	99500
2
	Machine hours	Maintenance cost
High level	75000	99500
Low level	45000	66500
Change	30000	33000
Variable cost	1.10	=33000/30000
Fixed cost	17000	=99500-(75000*1.1)
Y = 17000 + 1.10 X
3
	Variable cost per machine hour	Fixed cost
Utilities cost	1.20
Supervisory salaries cost		40000
Maintenance cost	1.10	17000
Total overhead cost	2.30	57000
Y = 57000 + 2.30 X
4
Total overhead cost	172000	=57000+(50000*2.30)