Question

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

Month	Machine- Hours			Total Overhead Cost
April		50,000		$	190,900
May		40,000		$	164,400
June		60,000		$	217,400
July		70,000		$	243,900

Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 40,000 machine-hour level of activity is:

Utilities (variable)	$	60,000
Supervisory salaries (fixed)		41,000
Maintenance (mixed)		63,400
Total overhead cost	$	164,400

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 $243,900 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $243,900 consisted of utilities and supervisory salaries. Think about the behavior of variable and fixed costs.)

2. Using the high-low method, estimate a cost formula for maintenance in the form Y = a + bX.

3. Express the company’s total overhead cost in the form Y = a + bX.

4. What total overhead cost would you expect to be incurred at an activity level of 45,000 machine-hours?

Answer 1

maintainance cost at july machine hour 70000
particulars	70000 Mhr
Total overhead cost	$       2,43,900.00
less: utilites cost @1.5per hour (70000*1.50)	$       1,05,000.00
supervisor salaries	$          41,000.00
maintainance cost	$          97,900.00
Utilities cost per hour = 60000/40000hrs = 1.50 per hour
	40000 mhR
Total overhead cost	$       1,64,400.00
less: utilites cost @1.1 per hour	$          60,000.00
supervisor salaries	$          41,000.00
maintainance cost	$          63,400.00
2) High low method for maintenance
particulars	machine hrs	maintenance cost
high activity level	$          70,000.00	$                    97,900.00
low level activity	$          40,000.00	$                    63,400.00
change	$          30,000.00	$                    34,500.00
Variable rate = change in cost /change in activity
34500/30000 = 1.15 per mh
total fixed cost
total maintainence cost at high level activity	97900
less: variable cost (70000*1.15 per mh)	80500
fixed cost	17400
Y = 17400+1.15X IS THE FORMULA OF COST
3) express co overhead in the form of a+bx
utilities cost	1.5 per MHR	Fixed cost
supervisor salaries cost		$                    41,000.00
maintenance cost	1.15 per MHR	$                    17,400.00
TOTAL OVERHEAD COST	2.65 per MHR	$                    58,400.00
Y = 58400+2.65X IS THE FORMULA OF COST
4) total overhead cost to be incurred at an activity level of 45000 machine hours
Y = 58400+2.65*45000 MHR
Y =58400+119250
COST = 177650