Nova Companys total overhead cost at various levels of activ

Nova Company’s total overhead cost at various levels of activity are presented below: Month Machine- Hours Total Overhead Cost April 49,000 $ 212,110 May 39,000 $ 186,210 June 59,000 $ 238,010 July 69,000 $ 263,910 Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 39,000 machine-hour level of activity is: Utilities (variable) $ 58,500 Supervisory salaries (fixed) 70,000 Maintenance (mixed) 57,710 Total overhead cost $ 186,210 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 $263,910 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $263,910 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 in the form Y = 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 44,000 machine-hours?

Solution

1. Maintenance cost at the 69,000 machine-hour level of activity can be isolated as follows

* 58500 / 39000 = 1.5

2. High-low analysis of maintenance cost:

Variable cost per unit of activity: = Change in cost / Change in activity

= 32700 / 30000

= 1.09 Per MH

Total fixed cost=

Therefore, the cost formula is $15,200 per month plus $1.09 per machine-hour or
Y = $15,200 + $1.09X

3.

Total overhead cost at an activity level of 44,000 machine-hours: