Question

Shak Inc has accumulated the following data for the past 5 months:

Number of units total overhead costs

August . 2,250 $39,820

September 2,340 $38,650

October . 2,180 $37,880

November 2,080 $38,110

December 2,090 $35,830

Shak Inc, uses the high/low method of separating mixed costs into variable  and fixed components.

Required:

A. Calculate the variable overhead costs per unit and the total fixed overhead costs.

B. If the company expects to produce 3,000 units in January, what will the estimated total overhead cost be?

Answer 1

1	Variable cost	=	$                 2.08
2	Total Fixed overhead cost	=	$            33,790
3	Total overhead cost	=	$            40,021
	Workings:
			Month	Units	Overhead cost
	High Activity	=	September	2340	$                              38,650
	Low Activity	=	November	2080	$                              38,110
	Difference	=		260	$                                    540
	Variable cost per unit	=	Difference in total cost / Difference in activity
		=	($540) / (260)
		=	$                 2.08
	Fixed Cost	=	Total cost - (Variable cost per socks X Activity)
		=	$38650 - ($2.08 X 2340)
		=	$            33,790
	or	=	$7,800 - ($15.4 X 280)
		=	$            33,790
	Computation of Total overhead cost for budgeted 3000 units for January:
	Total overhead cost	=	Fixed cost + Variable cost
		=	$33790 + ($2.08 X 3000)
		=	$            40,021