In: Accounting
Prospero Corporation’s total overhead costs at various levels of activity are presented below:
Month |
Machine-Hours |
Total Overhead Costs |
|
August |
8,000 |
$119,400 |
|
September |
12,000 |
$142,800 |
|
October |
16,000 |
$166,200 |
|
November |
4,000 |
$93,120 |
Assume that the total overhead costs above consist of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 4,000 machine-hour level of activity is:
Utilities (variable) |
$11,520 |
|
Supervisory salaries (fixed) |
15,600 |
|
Maintenance (mixed) |
66,000 |
|
Total overhead costs |
$93,120 |
Prospero Corporation’s management wants to break down the maintenance cost into its basic variable and fixed cost elements.
Required:
(1). Estimate how much of the $166,200 of overhead cost in October was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $166,200 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.
(3). Express the company’s total overhead costs in the linear equation form Y = a + bX.
(4). What total overhead costs would you expect to be incurred at an operating activity level of 15,000 machine-hours?
Answer to Requirement 1:
If 4,000 machine hours are used:
Utilities per machine hour = Utilities / Number of machine
hours
Utilities per machine hour = $11,520 / 4,000
Utilities per machine hour = $2.88
If 16,000 machine hours are used:
Utilities = Utilities per machine hour * Number of machine
hours
Utilities = $2.88 * 16,000
Utilities = $46,080
Total overhead costs = Utilities + Supervisory salaries +
Maintenance
$166,200 = $46,080 + $15,600 + Maintenance
Maintenance = $104,520
Answer to Requirement 2:
Variable maintenance per machine hour = (Maintenance for October
- Maintenance for November) / (Machine hours for October - Machine
hours for November)
Variable maintenance per machine hour = ($104,520 - $66,000) /
(16,000 - 4,000)
Variable maintenance per machine hour = $3.21
Fixed maintenance = Maintenance for October - Variable
maintenance per machine hour * Machine hours for October
Fixed maintenance = $104,520 - $3.21 * 16,000
Fixed maintenance = $53,160
Cost formula for maintenance = Fixed maintenance + Variable
maintenance per machine hour * Number of machine hours
Cost formula for maintenance = $53,160 + $3.21 * Number of Machine
hours
Answer to Requirement 3:
Variable overhead cost per machine hour = Utilities +
Maintenance
Variable overhead cost per machine hour = $2.88 + $3.21
Variable overhead cost per machine hour = $6.09
Fixed overhead = Supervisory salary + Maintenance
Fixed overhead = $15,600 + $53,160
Fixed overhead = $68,760
Total overhead cost = Fixed overhead + Variable overhead cost
per machine hour * Number of machine hours
Total overhead cost = $68,760 + $6.09 * Number of machine hours
Answer to Requirement 4:
Total overhead cost = $68,760 + $6.09 * Number of machine
hours
Total overhead cost = $68,760 + $6.09 * 15,000
Total overhead cost = $160,110