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		730			1,360		$	102,763
2		715			1,409			103,806
3		670			1,519			109,869
4		745			1,458			108,249
5		785			1,596			116,196
6		755			1,575			114,446
7		750			1,381			107,058
8		715			1,316			102,084
9		715			1,445			106,395
10		795			1,540			113,045
11		680			1,296			102,966
12		715			1,618			116,168

Required:

a. Use the high-low method to estimate the fixed and variable portions of overhead costs based on machine-hours. (Round "Variable cost" answer to 2 decimal places.)

b. Managers expect the plant to operate at a monthly average of 1,400 machine-hours next year. What are the estimated monthly overhead costs, assuming no inflation? (Round "Variable cost" answer to 2 decimal places.)

Answer 1

Answer:- a)-High-Low Method:-

Variable Cost per Unit

Variable cost per unit (b) is calculated using the following formula:

Variable cost per unit=Y2-Y1/X2-X1

Where,
y2 is the total cost at highest level of activity;
y1 is the total cost at lowest level of activity;
x2 are the number of units/miles/ labor ,machine hours etc. at highest level of activity; and
x1 are the number of units/miles/ labor, machine hours etc. at lowest level of activity

The variable cost per unit is equal to the slope of the cost volume line (i.e. change in total cost ÷ change in number of machine hours).

Total Fixed Cost

Total fixed cost (a) is calculated by subtracting total variable cost from total cost, thus:

Total Fixed Cost = y2 – b*x2 = y1 – b*x1

We have,
at highest activity: x₂ = 1618; y₂ = $116168
at lowest activity: x₁ = 1296; y₁ = $102966

Variable Cost per machine hour = ($116168− $102966) ÷ (1618 −1296)  

  = $13202/322 machine hours =$41 per machine hour

Total Fixed Cost = $116168 − ($41 × 1618) = $116168 – $66338 =$49830

b)-The estimated monthly overhead costs =

Variable costs+ Fixed costs

=(1400 machine hours*$41 per machine hour)+$49830

=$57400+$49830 =$107230