Question

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

Month	Machine- Hours			Total Overhead Cost
April		48,000		$	198,000
May		38,000		$	172,000
June		58,000		$	224,000
July		68,000		$	250,000

Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 38,000 machine-hour level of activity is:

Utilities (variable)	$	53,200
Supervisory salaries (fixed)		56,000
Maintenance (mixed)		62,800
Total overhead cost	$	172,000

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 $250,000 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $250,000 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 43,000 machine-hours?

Answer 1

1)	Maintenance cost a high level activity	98,800
		Low	High
	Machine hours	38000	68000
	Utilities(Variable)	53,200	95,200
	Sup salary (Fixed)	56,000	56,000
	Maintenance (Mixed)	62,800	98,800	(Balancing Figure)
	Total	172,000	250,000
2)		Direct labour hours	Maintenance Cost
	High level of activity	68,000	98,800
	low level of activity	38,000	62,800
	Change	30,000	36,000
	Variable cost Element	1.20	per machine hour
	Fixed cost element	17,200
3)		Variabe cost per machine hour	Fixed cost
	Utiities Cost	1.40
	Supervisor salary	1.47
	Maintenance cost	1.20	17,200
	Total Overhead cost	4.07	17,200.00
	Y = 17200 + 4.07X
4)	Total factory overhead cost	185,000
	Utilities(Variable)	60,200
	Sup salary (Fixed)	56,000
	Maintenance (Mixed)	51,600
	Fixed cost element(Mixed)	17,200
	Total	185,000