In: Accounting
Crosshill Company’s total overhead costs at various levels of activity are presented below:
Month | Machine-Hours | Total Overhead Cost |
April | 49,000 | $191,570 |
May | 39,000 | $166,270 |
June | 59,000 | $216,870 |
July | 69,000 | $242,170 |
Assume that the overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 39,000-machine-hour level of activity in May is as follows:
Utilities (variable) | $ | 54,600 |
Supervisory salaries (fixed) | 53,000 | |
Maintenance (mixed) | 58,670 | |
Total overhead cost | $ | 166,270 |
The company wants to break down the maintenance cost into its variable and fixed cost elements.
Required:
1. Estimate how much of the $242,170 of overhead cost in July was maintenance cost. (Hint: To do this, first determine how much of the $242,170 consisted of utilities and supervisory salaries. Think about the behaviour of variable and fixed costs within the relevant range.) (Do not round intermediate calculations.)
2. Using the high–low method, estimate a cost formula for maintenance. (Do not round your intermediate calculations. Round the "Variable cost per unit" to 2 decimal places.)
3. Express the company’s total overhead cost in the form Y = a + bX. (Do not round your intermediate calculations. Round the "Variable cost per unit" to 2 decimal places.)
4. What total overhead cost would you expect to be incurred at an activity level of 44,000 machine-hours? (Do not round intermediate calculations.)
1.
Maintenance cost in July = Total overhead cost - supervisor's salary - utilities
Maintenance cost in July = $242,170 - 53,000 - ($54,600/39,000*69,000)
Maintenance cost in July = $242,170 - 53,000 - 96,600 = $92,570
2.
Using High low method:
Total variable cost per machine hour = $242,170 - $166,270 / 69,000 - 39,000
Total variable cost per machine hour = $75,900 / 30,000 = $2.53
Total fixed cost = $242,170 - (69,000*$2.53)
Total fixed cost = $242,170 - 174,570 = $67,600
Maintenance variable cost per machine hour = Total variable cost per machine hour - Utilities cost per machine hour
Maintenance variable cost per machine hour = $2.53 - ($54,600/39,000)
Maintenance variable cost per machine hour = $2.53 - $1.4 = $1.13
Maintenance fixed cost = Total fixed cost - Supervisory salary
Maintenance fixed cost = $67,600 - 53,000 = $14,600
Cost formula for maintenance Y = $14,600 + $1.13*X
3.
By using the cost formula:
Y = $67,600 + $2.53 X
4.
Total overhead cost at activity level of 44,000 machine hours
Y = $67,600 + $2.53*44,000
Y = $67,600 + 111,320 = $178,920
Hence, Total overhead cost at activity level of 44,000 machine hours is $178,920