In: Accounting
Nova Company’s total overhead cost at various levels of activity are presented below: Month Machine- Hours Total Overhead Cost April 49,000 $ 212,110 May 39,000 $ 186,210 June 59,000 $ 238,010 July 69,000 $ 263,910 Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 39,000 machine-hour level of activity is: Utilities (variable) $ 58,500 Supervisory salaries (fixed) 70,000 Maintenance (mixed) 57,710 Total overhead cost $ 186,210 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 $263,910 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $263,910 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 44,000 machine-hours?
1. Maintenance cost at the 69,000 machine-hour level of activity can be isolated as follows
Level Of Activity | ||
39000 MH | 69000 MH | |
Total factory overhead cost | 186210 | 263910 |
Deduct | ||
Utilities cost @ $1.50 per MH* | 58500 | 103500 |
Supervisory salaries | 70000 | 70000 |
Maintenance cost | 57710 | 90410 |
* 58500 / 39000 = 1.5
2. High-low analysis of maintenance cost:
Machine Hours | Maintenance cost | |
High level of activity | 69000 | 90410 |
Low Level of activity | 39000 | 57710 |
Change | 30000 | 32700 |
Variable cost per unit of activity: = Change in cost / Change in activity
= 32700 / 30000
= 1.09 Per MH
Total fixed cost=
Total maintenance cost at the low activity level | $ | 57,710 |
Less the variable
cost element (39,000 MHs × $1.09 per MH) |
42,510 | |
Fixed cost element | $ | 15,200 |
Therefore, the cost formula is $15,200 per month plus $1.09 per
machine-hour or
Y = $15,200 + $1.09X
3.
Variable Rate per Machine-Hour | Fixed Cost | |||||||||||||||||
Maintenance cost | $ 1.09 | $ 15,200 | ||||||||||||||||
Utilities cost | 1.50 | |||||||||||||||||
Supervisory salaries cost | 70,000 | |||||||||||||||||
Totals | $ 2.59 | $ 85,200 | ||||||||||||||||
4.
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