In: Accounting
Nova Company’s total overhead cost at various levels of activity are presented below:
Month | Machine- Hours |
Total Overhead Cost |
|||
April | 46,000 | $ | 169,660 | ||
May | 36,000 | $ | 146,060 | ||
June | 56,000 | $ | 193,260 | ||
July | 66,000 | $ | 216,860 | ||
Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 36,000 machine-hour level of activity is:
Utilities (variable) | $ | 46,800 |
Supervisory salaries (fixed) | 46,000 | |
Maintenance (mixed) | 53,260 | |
Total overhead cost | $ | 146,060 |
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 $216,860 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $216,860 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 41,000 machine-hours?