Question

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

Month	Machine- Hours			Total Overhead Cost
April		49,000		$	185,290
May		39,000		$	160,190
June		59,000		$	210,390
July		69,000		$	235,490

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)	$	50,700
Supervisory salaries (fixed)		50,000
Maintenance (mixed)		59,490
Total overhead cost	$	160,190

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 $235,490 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $235,490 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

Requirement 1:-

Maintenance cost in July :-

In order to determine this, find the utilities and supervisory salaries

Utilities at 39,000 hours = $50,700

Utilities per hour = $50,700 / 39,000 hours

Utilities per hour = $1.30 per hour

July hours = 69,000 hours * $1.30 per hour = $89,700

Utilities expense in july = $89,700

Supervisory Salaries (fixed) = $50,000

Maintenance expense for July = Total overheads expense - Utilities expense - Supervisory salaries

=$235,490 - $89,700 - $50,000

Maintenance expense for July = $95,790

Requirement 2:-

High low method = (Highest activity cost - Lowest activity cost)/(Highest activity units - Lowest activity units)

= ($235,490 - $160,190)/(69,000 - 39,000)

=$75,300/30,000

=2.51 per unit

Fixed expenses = Total cost at 69,000 units - Variable expenses

Fixed expenses = $235,490 - (69,000 * $2.51)

Fixed expenses = $235,490 - $173,190

Fixed expenses = $62,300

where $62,000 is the fixed expenses

and $2.51 is the variable cost per unit

Based on the answer in requirement 1:- Maintenance cost in July = $95,790

Maintenance cost in May = $59,490

=($95,790 - $59,490)/(69,000 - 39,000)

=$36,300/30,000 hours

=$1.21 per hour variable cost

May total maintenance = $59,490

Variable maintenance = $1.21 * 39,000 hours = $47,190

Fixed costs = $59,490 - $47,190 = $12,300

Fixed maintenance cost = $12,300

Cost equation for Maintenance:-

Y = $12,300 + $1.21x

where $12,300 represents the fixed costs and 1.21 represents the variable cost per unit.

Requirement 3:-

The company's overhead cost form of Y = a + bX

Y = $62,000 + $2.51X

Requirement 4:-

Total overhead cost at 44,000 machine hours

Using the cost formula above:-

Y = $62,000 + $2.51(44,000 machine hours)

Y = $62,000 + $110,440

Y = $172,440

Total overhead cost at 44,000 machine hours = $172,440