Question

ova Company’s total overhead cost at various levels of activity are presented below: Month Machine- Hours Total Overhead Cost April 49,000 $ 199,830 May 39,000 $ 173,130 June 59,000 $ 226,530 July 69,000 $ 253,230 Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 39,000 machine-hour level of activity is: Utilities (variable) $ 58,500 Supervisory salaries (fixed) 55,000 Maintenance (mixed) 59,630 Total overhead cost $ 173,130 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 $253,230 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $253,230 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 44,000 machine-hours?

Answer 1

1)	Utilities	(58500/39000)*69000			103500
	Supervisory Salaries				55,000
	Maintenance (balancing figure)				94,730
	Total overhead cost				253,230
	Maintenance cost in july			94,730
2)	Estimating formula for maintenance cot
			MH's	cost
	high		69,000	94,730
	low		39,000	59,630
	Difference		30,000	35,100
	Variable cost per unit = 35100/30000
			1.17
	Fixed cost = 947330 - 69000*1.17
		14000
	Cost formula
	Y=	14,000	+	1.17	X
3)	Companys total overhead cost
				Variable	Fixed
	Utilities			1.5
	Supervisory salaries				55,000
	Maintenance cost			1.17	14,000
	total			2.67	69000
	cost formula
	Y=	69,000	+	2.67	X
4)	total overhead cost
	Y=	69,000	+	2.67	X
	so
	fixed cost				69,000
	Variable cost (44000*2.67)				117480
	total overhead cost				186,480	answer