Question

Audio Zone Co. needs to prepare pro forma financial statements for the next fiscal year. To do so, the company must forecast its total overhead cost. The actual machine hours and total overhead cost are presented below for the past six months.

Month	Total Overhead			Machine Hours
Jan.	$	6,320			1,990
Feb.		6,680			2,100
Mar.		6,020			1,750
Apr.		5,590			1,600
May		6,060			1,870
June		6,370			2,020

Using the high-low method, total monthly fixed overhead cost is calculated to be:

• $2,102.

• $1,821.

• $1,893.

• $1,707.

• $2,028.

PART TWO

Maintenance expenses of a company are to be analyzed for purposes of constructing a flexible budget. Examination of past records disclosed the following costs and volume measures:

	Highest			Lowest
Cost per month	$	48,000		$	40,000
Machine hours		55,000			39,000

Using the high-low technique, estimate the annual fixed cost for maintenance expenditures:

• $465,000.

• $248,000.

• $402,000.

• $258,000.

• $246,000.

Answer 1

1
	Total Overhead	Machine hours
High level	6680	2100
Low level	5590	1600
Difference	1090	500
Variable cost per unit	2.18	=1090/500
Total monthly fixed overhead cost	2102	=6680-(2100*2.18)
$2,102 is correct option
2
	Cost per month	Machine hours
High level	48000	55000
Low level	40000	39000
Difference	8000	16000
Variable cost per unit	0.50	=8000/16000
Total monthly fixed overhead cost	20500	=48000-(55000*0.5)
Annual fixed cost	246000	=20500*12
$246,000 is correct option