Question

Sawaya Co., Ltd., of Japan 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 45,600 60,800 Total factory overhead costs $ 234,300 $ 257,100 The factory overhead costs above consist of indirect materials, rent, and maintenance. The company has analyzed these costs at the 45,600-hour level of activity as follows: Indirect materials (variable) $ 59,280 Rent (fixed) 139,000 Maintenance (mixed) 36,020 Total factory overhead costs $ 234,300 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 $257,100 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 $257,100 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. Round "Variable cost element" to 2 decimal places.)

3. What total factory overhead costs would you expect the company to incur at an operating level of 50,160 direct labor-hours? (Do not round intermediate calculations.)

Answer 1

Indirect material per DLH:
Total Indirest material	59280
Divide: Total DLH		45600
Indirect material per DLH:	1.3
Req 1.
Miantennance cost:
Total OH at 60800 DLH activity		257100
Less: Indirect material (60800 DLH @1.30)	79040
Less: Rent expense			139000
Maintenance expense		39060
Req 2.
			Maintenance	DLH
			Cost
High activity		39060	60800
Low activity		36020	45600
Change			3040	15200
Maintenance variable cost per DLH = Change in cost / Change in DLH
				3040 /15200 = 0.20 per DLH
Total Maintenance cost at 60800 DLh	39060
Less: Variable cost (60800*0.20)	12160
Fixed Maintenance cost		26900
Maintenance cost function, C (X) = 26900+0.20X
Req 3.
Total Overheads at 50160 DLH:
Indirect material (50160*1.30)		65208
Rent expense			139000
Maintenance Cost (26900+0.20*50160)	36932
Total Overheads at 50160 DLH:		241140