Question

In: Accounting

Crosshill Company’s total overhead costs at various levels of activity are presented below: Month Machine-Hours Total...

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.)

Solutions

Expert Solution

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


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