Question

Best Car, Inc is trying to predict what manufacturing overhead will be for September. The following selected data were taken from the accounting records of Best Car:

Month	Machine hours	Manufacturing Overhead
May	46,000	890,000
June	60,000	1,150,000
July	70,000	1,300,000
August	55,000	950,000

Required:

1) By using the high-low method, calculate Best Car variable manufacturing overhead cost

2) Calculate the monthly fixed portion from b above

3) Assume that present cost behavior patterns continue into future months. Estimate the total amount of manufacturing overhead the company can expect in September if 56,000 machine hours are worked.

Answer 1

1)- By using the high-low method, calculate Best Car variable manufacturing overhead cost =$17.08 per machine hour

2)- Monthly fixed portion=$104400

3)-Total amount of manufacturing overhead=Variable + Fixed

=(56000 machine hour*17.08 per machine hour)+$104400

=$956480+$104400

=$1060880

Explanation:-

High-Low Method:-

Variable cost per unit (x) is calculated using the following formula:

Variable cost per unit=a2-a1/b2-b1

Where,
a2 is the total cost at highest level of activity;
a1 is the total cost at lowest level of activity;
b2 are the number of units at highest level of activity; and
b1 are the number of units at lowest level of activity

Total Fixed Cost

Total fixed cost (a) is calculated by subtracting total variable cost from total cost, thus:

Total Fixed Cost = a2 – x*b2 = a1 – x*b1

We have,
at highest activity: b₂ = 70000; a₂ = $1300000
at lowest activity: b₁ = 46000;   a₁ = $890000

Variable Cost per machine hour = ($1300000− $890000) ÷ (70000 − 46000)  

                                     = $410000/24000 hours =$17.08 per machine hour
Total Fixed Cost = $1300000 − ($17.08 × 70000) = $1300000 – $1195600 =$104400