Nova Companys total overhead cost at various levels of activ

Nova Company\'s total overhead cost at various levels of activity are presented Machine-Overhead Apeil 51,000 218,900 41,000 191.900 61,000 245,900 71,000 $272,900 July he total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these cost e at the 41,000 machine-hour level of activity is: Otilitles (varlable) Supervisory salaries (tixed) Maistenance (mixed) Total ovethead oost 65,600 69,000 Nova Company\'s management wants to break down the maintenance cost into its variable and fixed cost elements 1. Estimate how much of the $272,900 of overhead cost in July was maintenance cost (Hint to do this, it may be helpful to first consisted of utilities and supervisory salarles. Think about the behavior of variable and fixed costs) 2. Using the high-low method, estimate a cost formula for maintenance in the form Ya bx 3. Express the company\'s total overhead cost in the form Y«a . 4.What total overhead cost would you expect to be incurred at an activity level of 46.000 machine-hours? Prev 162 Next > 5 6 8

Solution

1. Maintenance cost for July:
Total overhead cost = $272,900
Less: Supervisory salaries i.e., fixed cost = (69,000)
Less: Utility cost (65,600/41,000machine hours)= 1.6per machine hour*71,000 hours in July = (113,600)
Maintenance cost for July = $90,300

2. Cost formula for maintenance in the form Y = a+bX

Machine hours

Maintenance cost

High activity level

         71,000

         90,300

Low activity level

         41,000

         57,300 (note)

Change

         30,000

         33,000

Variable cost element

33,000/30,000 =

1.1

Fixed element

        90,300-(71,000*1.1)=

12,200

Note: Maintenance cost for low level activity:
Total overhead cost = $191,900
Less: Supervisory salaries i.e., fixed cost = (69,000)
Less: Utility cost =(65,600)
Low level Maintenance cost = $57,300

3. Liner equation Y = a+bX

Variance cost per

Machine hour

Fixed cost

Utility cost

1.16

Supervisory cost

         69,000

Maintenance cost

1.1

         12,200

2.26

         81,200

Y = 81,200+2.26X

4. Total overhead cost at activity level 46,000 machine hours:
Total overhead cost = 81,200+ 2.26*46,000
= 81,200+103,960 = $185,160

	Machine hours	Maintenance cost
High activity level	71,000	90,300
Low activity level	41,000	57,300 (note)
Change	30,000	33,000
Variable cost element	33,000/30,000 =	1.1
Fixed element	90,300-(71,000*1.1)=	12,200