Question

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

Month	Machine- Hours			Total Overhead Cost
April		70,000		$	198,000
May		60,000		$	174,000
June		80,000		$	222,000
July		90,000		$	246,000

Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 60,000 machine-hour level of activity is:

Utilities (variable)	$	48,000
Supervisory salaries (fixed)		21,000
Maintenance (mixed)		105,000
Total overhead cost	$	174,000

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 $246,000 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $246,000 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 75,000 machine-hours

Answer 1

1)	Utilities	(48000/60000)*90000			72000
	Supervisory Salaries				21,000
	Maintenance (balancing figure)				153,000
	Total overhead cost				246,000
	Maintenance cost in july			153,000
2)	Estimating formula for maintenance cot
			MH's	cost
	high		90,000	153,000
	low		60,000	105,000
	Difference		30,000	48,000
	Variable cost per unit = 48000/30000
			1.6
	Fixed cost = 153000-90000*1.6
		9000
	Cost formula
	Y=	9,000	+	1.6	X
3)	Companys total overhead cost
				Variable	Fixed
	Utilities			0.8
	Supervisory salaries				21,000
	Maintenance cost			1.6	9,000
	total			2.4	30000
	cost formula
	Y=	30,000	+	2.4	X
4)	total overhead cost
	Y=	30,000	+	2.4	X
	so
	fixed cost				30,000
	Variable cost (75000*2.4)				180000
	total overhead cost				210,000	answer