GIOJ is a manufacturing company whose total factory overhead

GIOJ is a manufacturing company whose total factory overhead costs fluctuate considerably from year to year according to increases and decreases in the number of direct labor-hours worked in the factory. Total factory overhead costs at high and low levels of activity for recent years are given below:

Level of Activity

The factory overhead costs above consist of indirect materials, rent, and maintenance. The company has analyzed these costs at the 48,300-hour level of activity as follows:

To have data available for planning, the company wants to break down the maintenance cost into its variable and fixed cost elements.

Estimate how much of the $304,780 factory overhead cost at the high level of activity consists of maintenance cost. (Hint: To do this, it may be helpful to first determine how much of the $304,780 consists of indirect materials and rent. Think about the behavior of variable and fixed costs!) (Do not round intermediate calculations.)

Using the high-low method, estimate a cost formula for maintenance. (Do not round intermediate calculations.)

What total factory overhead costs would you expect the company to incur at an operating level of 53,130 direct labor-hours? (Do not round intermediate calculations.)

Solution

1) Estimate how much of the $304,780 factory overhead cost at the high level of activity consists of maintenance cost.

2) Using the high-low method, estimate a cost formula for maintenance. (Do not round intermediate calculations.)

Variable cost per hour = Change in cost/change in hours

= (54860-48420)/(64400-48300)

Variable costper hour = 0.40 per hour

Fixed cost = Total cost-variable cost

= 54860-(64400*.40)

Fixed cost = 29100

Y=a+bx

Y=29100+0.40*X

3) What total factory overhead costs would you expect the company to incur at an operating level of 53,130 direct labor-hours? (Do not round intermediate calculations.)