Problem 5A8 HighLow Method Predicting Cost LOS10 Nova Compan

Problem 5A-8 High-Low Method; Predicting Cost [LOS-10] Nova Company\'s total overhead cost at various levels of activity are presented below: Tota Nachine-Overhead Month April May June July Hours 51,000 181,360 41,000 157,760 61,000$ 204,960 71,000 228,560 Cost Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. T at the 41,000 machine-hour level of activity is: Utilities (variable) Supervisory salarien (Eixed) Maintenance (mixed ) Total overhead cost $ 53,300 48,000 56,460 $157,760 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 $228.560 of overhead cost in July was maintenance cost. (Hint to do this, it may be helpful to first determine how much of the $228,560 consisted of utlities 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 ?= 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 46.000 machine-hours?

Solution

1) Utilities Cost per hour = Utilities Cost/Machine hrs in May

= $53,300/41,000 = $1.30 per hour

Utilities cost for july = 71,000 hrs*$1.30 per hour = $92,300

Maintenance cost in July = Total Overhead cost - Utilities - Supervisory Salaries

= $228,560 - $92,300 - $48,000 = $88,260

Therefore the maintenance cost in july is $88,260.

2) Variable maintenance cost per hr = (Maint. cost in July - Maint. cost in May)/(M.hrs July - M.hrs May)

= ($88,260 - $56,460)/(71,000 hrs - 41,000 hrs)

= $31,800/30,000 hrs = $1.06 per hour

Fixed manitenance cost = Total Maintenance cost for May - Variable maintenance cost for May

= $56,460 - (41,000 hrs*$1.06 per hr)

= $56,460 - $43,460 = $13,000

Cost formula for maintenance = $13,000+$1.06X (Where X = Machine hours)

3) Total Fixed Overhead cost = Fixed maintenance cost+Supervisory Salaries

= $13,000+$48,000 = $61,000

Total Variable overhead cost per hour = Variable maintenance+Utilities cost

= $1.06 per hour+$1.30 per hour = $2.36 per hour

Company\'s total overhead cost = $61,000+$2.36X (Where X = Machine hours)

4) Total OH cost at 46,000 machine hours = $61,000+($2.36*46,000 hrs)

= $61,000+$108,560 = $169,560