Question

Chapter 6 Homework

Problem 6A-8 High-Low Method; Predicting Cost [LO6-10]

Nova Company’s total overhead cost at various levels of activity are presented below:

Month	Machine- Hours			Total Overhead Cost
April		46,000		$	168,260
May		36,000		$	144,660
June		56,000		$	191,860
July		66,000		$	215,460

Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 36,000 machine-hour level of activity is:

Utilities (variable)	$	46,800
Supervisory salaries (fixed)		45,000
Maintenance (mixed)		52,860
Total overhead cost	$	144,660

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 $215,460 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $215,460 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 41,000 machine-hours?

Answer 1