Question

The management of Casablanca Manufacturing Corporation believes that machine-hours is an appropriate measure of activity for overhead cost. Shown below are machine-hours and total overhead costs for the past six months:

	Machine-Hours			Overhead Cost
Jan	150,000			$	339,000
Feb	140,000			$	328,000
Mar	160,000			$	350,000
Apr	130,000			$	319,500
May	170,000			$	362,500
Jun	200,000			$	400,000

Assume that the relevant range includes all of the activity levels mentioned in this problem.

If Casablanca expects to incur 185,000 machine hours next month, what will the estimated total overhead cost be using the high-low method? (Round your intermediate calculations to 2 decimal places.)

Multiple Choice

• $212,750

• $359,750

• $382,750

• $381,700

Answer 1

Answer:

Determination of total overhead cost to incur for185,000 machine hours:

Particulars	Amount
Variable overhead cost for 185,000 machine hrs (185,000 x $1.15)	$212,750
Fixed Overhead cost	$170,000
Total Overhead Cost for 185,000 machine hours	$382,750

Accordingly, Option (c) i.e $382,750 is the correct answer.

Notes:

Determination of Variable & fixed cost per hours using the high low method:

Variable cost per unit = (Cost at highest activity level - Cost at the lowest activity level) Highest machine hrs - Lowest machine hrs.)

Variable cost per unit = ($400,000 - $319,500) / (200,000 - 130,000)

= $1.15 per machine hrs.

Fixed Cost = $400,000 - (200,000 x 1.15)

= $170,000