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		47,100		62,800
Total factory overhead costs	$	249,500	$	280,900

The factory overhead costs above consist of indirect materials, rent, and maintenance. The company has analyzed these costs at the 47,100-hour level of activity as follows:

Indirect materials (variable)	$	70,650
Rent (fixed)		130,000
Maintenance (mixed)		48,850
Total factory overhead costs	$	249,500
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 $280,900 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 $280,900 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.) Direct labor hours Maintenance cost High level of activity Low Level of activity Change Variable cost element Fixed cost element Y= + X What total factory overhead costs would you expect the company to incur at an operating level of 51,810 direct labor-hours? (Do not round intermediate calculations.) Total factory overhead cost

Answer 1

1) Estimate how much of the $280,900 factory overhead cost at the high level of activity consists of maintenance cost.

Direct labour hour	47100	62800
Indirect materials (variable)	70650	(70650/47100*62800) = 94200
Rent (fixed)	130000	130000
Maintenance (mixed)	48850	56700
Total factory overhead costs	249500	280900

So answer is $56700

2) Using the high-low method, estimate a cost formula for maintenance.

	Direct labour hours	Maintenance cost
High level of activity	47100	48850
Low Level of activity	62800	56700
Change	15700	7850
Variable cost element	0.50	per labour hour
Fixed cost element	$25300

Y = a+bx

Y = 25300+0.50X

3) Total factory overhead at 51810 direct labour hours

Direct labour hours	51810
Indirect materials (variable)	70650/47100*51810 = 77715
Rent (fixed)	130000
Maintenance (mixed)	(51810*0.50+25300) = 51205
Total factory overhead cost	258920