Question

Adriana Corporation manufactures football equipment. In planning for next year, the managers want to understand the relation between activity and overhead costs. Discussions with the plant supervisor suggest that overhead seems to vary with labor-hours, machine-hours, or both. The following data were collected from last year's operations.

Month	Labor-Hours			Machine-Hours			Overhead Costs
1		735			1,364		$	102,675
2		715			1,407			103,885
3		675			1,519			109,961
4		745			1,445			108,299
5		780			1,591			116,141
6		755			1,584			114,405
7		735			1,388			107,088
8		725			1,315			102,033
9		710			1,455			106,321
10		800			1,554			113,085
11		675			1,292			101,793
12		710			1,618			115,322

Required:

a. Use the high-low method to estimate the fixed and variable portions of overhead costs based on machine-hours.

b. Managers expect the plant to operate at a monthly average of 1,700 machine-hours next year. What are the estimated monthly overhead costs, assuming no inflation?

Answer 1

Answer a.

Highest activity:

Overhead costs = $115,322
Machine hours = 1,618

Lowest activity:

Overhead costs = $101,793
Machine hours = 1,292

Variable overhead cost per machine hour = (Overhead cost at highest activity - Overhead cost at lowest activity) / (Machine hours at highest activity - Machine hours at lowest activity)
Variable overhead cost per machine hour = ($115,322 - $101,793) / (1,618 - 1,292)
Variable overhead cost per machine hour = $13,529 / 326
Variable overhead cost per machine hour = $41.50

Fixed overhead cost = Overhead cost at highest activity - Variable overhead cost per machine hour * Machine hours at highest activity
Fixed overhead cost = $115,322 - $41.50 * 1,618
Fixed overhead cost = $115,322 - $67,147
Fixed overhead cost = $48,175

Answer b.

Estimated overhead costs = Variable overhead cost per machine hour * Estimated Machine hours + Fixed overhead cost
Estimated overhead costs = $41.50 * 1,700 + $48,175
Estimated overhead costs = $70,550 + $48,175
Estimated overhead costs = $118,725