Question

Nova Company’s total overhead cost at various levels of activity are presented below:

Month	Machine- Hours			Total Overhead Cost
April		52,000		$	198,260
May		42,000		$	172,460
June		62,000		$	224,060
July		72,000		$	249,860

Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 42,000 machine-hour level of activity is:

Utilities (variable)	$	58,800
Supervisory salaries (fixed)		49,000
Maintenance (mixed)		64,660
Total overhead cost	$	172,460

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 $249,860 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $249,860 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 47,000 machine-hours?

Answer 1

1
Total overhead cost	249860
Less: Utilities	100800	=58800/42000*72000
Less: Supervisory salaries	49000
Maintenance cost in July	100060
2
	Machine hours	Maintenance cost
High level	72000	100060
Low level	42000	64660
Difference	30000	35400
Variable cost	1.18	=35400/30000
Fixed cost	15100	=100060-(72000*1.18)
Y = 15100 + 1.18 X
3
	Variable cost per machine hour	Fixed cost
Utilities cost	1.40
Supervisory salaries cost		49000
Maintenance cost	1.18	15100
Total overhead cost	2.58	64100
Y = 64100 + 2.58 X
4
Total overhead costs	185360	=64100+(47000*2.58)