Question

Adriana Corporation manufactures football equipment. In planning for next year, the managers want to understand the relation between activity and overhead costs. Discussions with the plant supervisor suggest that overhead seems to vary with labor-hours, machine-hours, or both. The following data were collected from last year's operations: Month Labor-Hours Machine-Hours Overhead Costs 1 730 1,359 $ 102,627 2 710 1,406 103,846 3 685 1,514 109,953 4 745 1,454 108,287 5 770 1,592 116,135 6 750 1,586 114,429 7 750 1,399 107,017 8 720 1,310 102,037 9 700 1,447 106,441 10 785 1,537 113,117 11 680 1,294 102,392 12 705 1,606 115,028

Required: a. Use the high-low method to estimate the fixed and variable portions of overhead costs based on machine-hours. (Round "Variable cost" answer to 2 decimal places.)

b. Managers expect the plant to operate at a monthly average of 1,400 machine-hours next year. What are the estimated monthly overhead costs, assuming no inflation? (Round "Variable cost" answer to 2 decimal places.)

Answer 1

(a) Use the high-low method to estimate the fixed and variable portions of overhead costs based on machine-hours. (Round your variable cost answer to 2 decimal places.)
Variable cost per unit = (Cost at highest activity level - Cost at lowest activity levl)/(Highest activity level - Lowest activity level)
Variable cost per unit = (115,028-102392)/(1606-1294)	$           40.50	per machine hours
Fixed Cost = 115028 - (40.50 x 1606)	$    49,985.00
(b) Managers expect the plant to operate at a monthly average of 1,400 machine-hours next year. What are the estimated monthly overhead costs, assuming no inflation?
Total Monthly overhead = $49,985 +(40.50x 1400)	$ 1,06,685.00