Question

Waldorf Corporation had the following overhead costs for the previous year (Waldorf allocates overhead on the basis of direct labour hours):

Labour hours Total Overhead

1st Quarter 7,000 $ 75,000

2nd Quarter 6,000 $ 74,000

3rd Quarter 8,000 $ 77,000

4th Quarter 7,500 $ 76,000

Assume that total overhead is comprised of Indirect materials (a variable cost), Rent (a fixed cost) and Maintenance (a mixed cost). The breakdown of these three costs at the 6,000 labour hour level is as follows:

Indirect materials (V) $ 3,600

Rent (F) 35,000

Maintenance (M) 35,400

$ 74,000

Determine how much of the total overhead at the 8,000 direct labour hour is maintenance. Using the amount just determined and the high low method, estimate a cost formula for maintenance. Determine what the cost formula for total overhead would be and estimate what total overhead costs would be at the 10,000 direct labour hour level.

 

Answer 1

Answers

Part a

Cost at 8,000 hours = ($ 3,600 / 6000*8000) + $ 35,000 + Mixed Cost

$ 77,000 = ($ 3,600 / 6000*8000) + $ 35,000 + Mixed Cost

Mixed Cost = $ 37,200

Part b

	Lowest range	Highest range
Cost	$        35,400	$         37,200
Hours	6,000	8,000

As per High Low Method,
Variable cost per hour =	Change in costs / change in hours
Variable cost per hour =	($ 37200 - $ 35400) / (8000 - 6000)
Variable cost per hour =	$ 1800 / 2000
Variable cost per hour =	$ 0.90 per hour
Fixed Cost =	Total Cost - Variable Cost
Fixed Cost =	Total Cost - (Variable Cost per hour * hours)
Fixed Cost =	$ 37200 - ($ 0.9 * 8000)
Fixed Cost =	$ 30,000

Cost formula for maintenance = 30,000 + (0.9*Hours)

Part c

Cost formula for total overheads = 30,000 + 35,000 + ((0.9+0.6)*Hours)

Cost formula for total overheads = 65,000 + (1.5*Hours)

Part d

Total Cost =  65,000 + (1.5*Hours)

Total Cost =  65,000 + (1.5 * 10,000)

Total Cost =  $ 80,000

In case of any doubt or clarification, you're welcome to come back via comments.