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In: Accounting

Nova Company’s total overhead cost at various levels of activity are presented below: Month Machine- Hours...

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?

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