Question

Adriana Corporation manufactures football equipment. In planning for next year, the managers want to understand the relation between activity and overhead costs. Discussions with the plant supervisor suggest that overhead seems to vary with labor-hours, machine-hours, or both. The following data were collected from last year's operations.

Month	Labor-Hours			Machine-Hours			Overhead Costs
1		725			1,358		$	102,740
2		720			1,416			103,850
3		675			1,523			109,964
4		745			1,445			108,298
5		790			1,588			116,141
6		745			1,584			114,509
7		745			1,381			107,062
8		730			1,306			102,057
9		710			1,447			106,332
10		790			1,552			113,179
11		675			1,284			99,063
12		710			1,610			111,940

Required:

a. Use the high-low method to estimate the fixed and variable portions of overhead costs based on machine-hours.

b. Managers expect the plant to operate at a monthly average of 1,600 machine-hours next year. What are the estimated monthly overhead costs, assuming no inflation?

Answer 1

Answer:

(a)

Variable cost per MH     = ( Overhead Costs at Highest level of MH (-) Overhead Costs at Lowest Level MH)                               / ( Highest Machine-Hours(-) lowest Machine-Hours )     =    ( $ 111,940 (-) $ 99,063 ) / ( 1,610 (-) 1,284 )     =    $ 12,877 / 326     =   $ 39.50 Per MH

Fixed cost =   Overhead Costs at Highest level of MH (-) ( Highest Machine-Hours x Variable cost per unit   )                        = $ 111,940 (-) ( 1,610 x $ 39.50)                        = $ 111,940 (-) $ 63,595                        =    $ 48,345

(b)

Estimated monthly overhead costs              = Fixed Cost + ( 1,600 MH x Variable Cost per MH )              =   $ 48,345 + ( 1,600 x 39.50 )              =    $ 48,345 + $ 63,200             =    $ 111,545

Estimated monthly overhead costs   =      $ 111,545