Question

GIOJ is a manufacturing company whose total factory overhead costs fluctuate considerably from year to year according to increases and decreases in the number of direct labor-hours worked in the factory. Total factory overhead costs at high and low levels of activity for recent years are given below:

	Level of Activity
	Low		High
Direct labor-hours		48,300		64,400
Total factory overhead costs	$	269,360	$	304,780

The factory overhead costs above consist of indirect materials, rent, and maintenance. The company has analyzed these costs at the 48,300-hour level of activity as follows:

Indirect materials (variable)	$	86,940
Rent (fixed)		134,000
Maintenance (mixed)		48,420
Total factory overhead costs	$	269,360

To have data available for planning, the company wants to break down the maintenance cost into its variable and fixed cost elements.

Required:

1.	Estimate how much of the $304,780 factory overhead cost at the high level of activity consists of maintenance cost. (Hint: To do this, it may be helpful to first determine how much of the $304,780 consists of indirect materials and rent. Think about the behavior of variable and fixed costs!) (Do not round intermediate calculations.)

     

2.	Using the high-low method, estimate a cost formula for maintenance. (Do not round intermediate calculations.)

     
       

3.	What total factory overhead costs would you expect the company to incur at an operating level of 53,130 direct labor-hours? (Do not round intermediate calculations.)

     

Answer 1

1) Estimate how much of the $304,780 factory overhead cost at the high level of activity consists of maintenance cost.

Indirect material (variable) (1.8*64400)	115920
Rent (fixed)	134000
Maintenance (mixed)	54860
Total cost	304780

2) Using the high-low method, estimate a cost formula for maintenance. (Do not round intermediate calculations.)

Variable cost per hour = Change in cost/change in hours

= (54860-48420)/(64400-48300)

Variable costper hour = 0.40 per hour

Fixed cost = Total cost-variable cost

= 54860-(64400*.40)

Fixed cost = 29100

Y=a+bx

Y=29100+0.40*X

3) What total factory overhead costs would you expect the company to incur at an operating level of 53,130 direct labor-hours? (Do not round intermediate calculations.)

Indirect material (variable) (1.8*53130)	95634
Rent (fixed)	134000
Maintenance (mixed) (53130*0.40+29100)	50352
Total cost	279986