Nova Companys total overhead cost at various levels of activ

Nova Company\'s total overhead cost at various levels of activity are presented below: Total Machine-Overhead Month April May une July Hours 55,000 45,000 203,050 65,000 257,650 75,000 284,950 Cost s230,350 Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 45,000 machine-hour level of activity is: Utilities (variable) Supervisory salaries (fixed) Maintenance (mixed) Total overhead cost $67,500 61,000 74,550 $203,050 Nova Company\'s management wants to break down the maintenance cost into its variable and fixed cost elements

Solution

To know the total overhead cost, we need to know the per hour cost for variable costs.

1. Utilities:

At 45,000 hours, it costs $67,500, which implies $1.50 per machine hour.

2. Supervisory salaries:

This is a fixed cost which will be same at any number of machine hours.

3. Maintenance Cost:

It is a mixed cost, which is a combination of fixed and variable cost. To bifurcate this cost into fixed and variable, we need to find maintenance cost for any other level of hours, lets find maintenace cost at 55,000 machine hours.

Maintenance cost at 55,000 hours = $230,350 - (55,000 x $1.50) - $61,000 = $86,850.

At 55,000 hours Maintenance cost is $86,850, at 45,000 hours it is $74,550.

Variable portion of maintenance cost = ($86,850 - $74,550 ) / (55,000 - 45,000) = $1.23 per machine hour.

Fixed portion of maintenance cost at 45,000 machine hours = $74,550 - (45,000 x $1.23) = $19,200.

Total Overhead cost at 50,000 machine hours is as follows:

Utilities :    50,000 x $1.50 = $75,000

Supervisory salaries :                                             $61,000

Maintenance Cost (fixed) :                                     $19,200

Maintenance cost (variable) : 50,000 x $1.23 = $61,500

Total Overhead Cost:                                           $216,700

Therefore, the total overhead cost is $216,700 at 50,000 machine-hours activity level.