Question

Nova Company’s total overhead costs at various levels of activity follow:

Month	Machine-Hours		Total Overhead Costs
April	78,000		$	214,000
May	115,500			286,000
June	96,000			238,000
July	106,000			246,640

Assume that the total overhead costs consist of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 78,000 machine-hour level of activity is as follows:

Utilities (V)	$	48,640
Supervisory salaries (F)		22,600
Maintenance (M)		142,760
Total overhead costs	$	214,000

V = variable; F = fixed; M = mixed.

Nova Company’s management wants to break the maintenance cost down into its basic variable and fixed cost elements.

Required:

1. As shown, overhead costs in May amounted to $286,000. Determine how much of this consisted of maintenance cost. (Hint: To do this, it may be helpful to first determine how much of the $286,000 consisted of utilities and supervisory salaries. Think about the behaviour of variable and fixed costs!) (Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.)

2. By means of the high–low method, estimate a cost formula for maintenance. (Do not round intermediate calculations. Round "Fixed cost" answer to the nearest whole dollar and "Variable cost" answer to 2 decimal places.)

3. Express the company’s total overhead costs in the linear equation form Y = a + bX. (Do not round intermediate calculations. Round "Fixed cost" answer to the nearest whole dollar and "Variable cost" answer to 2 decimal places.)

4. What total overhead costs would you expect to be incurred at an operating activity level of 76,000 machine-hours? At an operating activity level of 91,000 machine-hours? (Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.)

Answer 1

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Nova Company
Workings for Answer 1
Particulars	Amount $	Note
Utilities cost of April	48,640.00	A
Machine hours in April	78,000.00	B
Utilities cost per machine hour	0.6236	C=A/B
For the month of May	Amount $
Machine hours in May	115,500.00	D
Utilities cost per machine hour	0.62	See C
Utilities cost of May	72,025.00	E=D*C
Final Answer 1	Amount $
Total cost of May	286,000.00
Less: Utilities cost	72,025.00	See E
Less: Supervisory salaries	22,600.00
Maintenance cost of May	191,375.00	F

Answer 2

High Low method

Variable cost= (Highest activity cost- Lowest activity cost)/ (Highest activity units- Lowest activity units)

Activity	Month	Machine hours	Maintenance cost
Highest activity	July	106,000.00	246,640.00
Lowest activity	April	78,000.00	214,000.00
Change		28,000.00	32,640.00
Variable cost per machine hour	1.17

Fixed cost: Highest activity cost- (Highest units * Variable cost per hour)

Fixed cost:	246640-(106000*1.17)
Fixed cost element	122,620.00
Answer 3	Variable cost per machine hour	Fixed cost	Note
Utilities cost	0.62	-	See C
Supervisory salaries	-	22,600.00
Maintenance cost	1.17	122,620.00	See Ans 2
Total overhead cost	1.79	145,220.00	G
Y= $ 145,220+ 1.79*X
Answer 4	Amount $	Amount $	Note
Machine Hours	76,000.00	91,000.00	H
Variable cost per hour	1.79	1.79	See G
Variable cost	136,313.00	163,217.00	I=H*G
Add: Fixed cost	145,220.00	145,220.00	See G
Total cost	281,533.00	308,437.00