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		3,625			6,775		$	513,435
2		3,575			7,035			518,960
3		3,400			7,600			549,575
4		3,700			7,265			541,400
5		3,900			7,955			581,145
6		3,775			7,895			572,320
7		3,700			6,950			535,110
8		3,625			6,530			510,470
9		3,550			7,270			532,195
10		3,975			7,725			565,335
11		3,375			6,490			503,775
12		3,550			8,020			564,210

Required:

a. Use the high-low method to estimate the fixed and variable portions of overhead costs based on machine-hours.
b. Managers expect the plant to operate at a monthly average of 7,500 machine-hours next year. What are the estimated monthly overhead costs, assuming no inflation?

Answer 1

Solution

Title	overhead	Machine hours
High activity level	$564210	8020
Low activity level	$503775	6490
Diffrence	$60435	1530

A) Variable portion of overhead cost = Difference in overhead/ difference in machine level

=$60435/1530

=$39.5

Fixed portion of overhead cost = High activity level of overhead -(high machine level*variable cost)

= $564210- (8020*39.5)

$564210-316790

=$247420

2) Monthly overhead cost = fixed portion of overhead cost+ (machine hours company expects for next year * variable cost)

$247420+(7500*39.5)

= 247420+296250

=$543670