Question

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

Month	Machine- Hours		Total Overhead Cost
April	49,000		$	205,220
May	39,000		$	179,420
June	59,000		$	231,020
July	69,000		$	256,820

Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 39,000 machine-hour level of activity is:

Utilities (variable)	$	58,500
Supervisory salaries (fixed)		64,000
Maintenance (mixed)		56,920
Total overhead cost	$	179,420

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 $256,820 of overhead cost in July was maintenance cost. (Hint: To do this, it may be helpful to first determine how much of the $256,820 consisted of utilities and supervisory salaries. Think about the behavior of variable and fixed costs!) (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 machine-hours" to 2 decimal places.)

	Machine Hours	Maintenance Cost
High activity level
Low activity level
Change		$
Variable cost element		per mH
Fixed cost element

Y= a + bX

3. Express the company’s total overhead cost in the linear equation form Y = a + bX. (Do not round your intermediate calculations. Round the "Variable cost per machine-hours" to 2 decimal places.)

	Variable cost per
	Machine-Hour	Fixed Cost
Utilities cost
Supervisory salaries cost
Maintenance cost
Total overhead cost	$	$

y= a +bX

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.)

Answer 1

1)	Utilities	(58500/39000)*69000=			103500
	Supervisory Salaries				64,000
	Maintenance (balancing figure)				89,320
	Total overhead cost				256,820
2)	Estimating formula for maintenance cot
			MH's	cost
	high		69,000	89,320
	low		-39,000	-56,920
	Difference		30,000	32,400
	Variable cost per unit = 32400/30000
			1.08
	Fixed cost = 89320 - 69000*1.08
		14800
	Cost formula
	Y=	14,800	+	1.08	X
3)	Companys total overhead cost
				Variable	Fixed
	Utilities			1.5
	Supervisory salaries				64,000
	Maintenance cost			1.08	14,800
	total			2.58	78800
	cost formula
	Y=	78,800	+	2.58	X
4)	total overhead cost
	Y=	78,800	+	2.58	X
	so
	fixed cost				78,800
	Variable cost (44000*2.58)				113520
	total overhead cost				192,320	answer