Question

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

Month	Machine- Hours			Total Overhead Cost
April		48,000		$	164,060
May		38,000		$	140,860
June		58,000		$	187,260
July		68,000		$	210,460

Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 38,000 machine-hour level of activity is:

Utilities (variable)	$	45,600
Supervisory salaries (fixed)		40,000
Maintenance (mixed)		55,260
Total overhead cost	$	140,860

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 $210,460 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $210,460 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 43,000 machine-hours?

Answer 1

1	Computation of Maintainance cost
		38,000 hours	68,000 hours
	Total overhead cost	$1,40,860	$2,10,460
	Less:Utilities($1.20 per hour)	$45,600	$81,600
	Less:Supervisory salaries	$40,000	$40,000
	Maintainance cost	$55,260	$88,860
	Variable maintainance cost per unit =($88,860 - $55,260) / (68,000 - 38,000)
	Variable maintainance cost per unit =$33,600 / 30,000 =$1.12 per hour
2		Direct labor hours	Maintainance cost
	High level of activity	68,000	$88,860
	Low level of activity	38,000	$55,260
	Change	30,000	$33,600
	Variable maintainance cost per unit =$33,600 / 30,000 hours =$1.12 per hour
	Fixed cost element =$88,860 - (68,000 hours*$1.12)
	Fixed cost element =$88,860 - $11,600 =$12,700
	Y =$12,700 + $1.12X
3	Total Factory Overhead cost
		Direct labor hours	Factory OH cost
	High level of activity	68,000	$2,10,460
	Low level of activity	38,000	$1,40,860
	Change	30,000	$69,600
	Variable factory cost per unit =$69,600 / 30,000 hours =$2.32 per hour
	Fixed cost element =$210,460 - (68,000 hours*$2.32)
	Fixed cost element =$210,460 - $157,760 =$52,700
	Y =$52,700 + $2.32X
4	Total Factory Overhead cost =$52,700+ 43,000 hours*$2.32 =$152,460