Question

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

Month	Machine- Hours			Total Overhead Cost
April		48,000		$	199,940
May		38,000		$	172,640
June		58,000		$	227,240
July		68,000		$	254,540

Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 38,000 machine-hour level of activity is:

Utilities (variable)	$	57,000
Supervisory salaries (fixed)		54,000
Maintenance (mixed)		61,640
Total overhead cost	$	172,640

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 $254,540 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $254,540 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 43,000 machine-hours?

Answer 1

Part 1

Utilities Cost per machine hour = $57,000/38,000 hours = $1.5 per hour

Supervisory Salaries = $54,000

Maintenance Cost in July = $254,540-$54,000-($1.5 per hour*68,000 hours)

= $98,540

Part 2

Y=a+bX

Y= Total maintenance cost

a= Total fixed cost

b= Variable cost per unit

x= Number of units

Segregation of variable cost and fixed cost using high low method-

(y2-y1)/(x2-x1)

Variable Cost per hour =

y2 =$98,540 , y1= $61,640 , x2 = 68,000 hours , x1 = 38,000 hours

= ($98,540-$61,640)/(68,000-38,000)

= $1.23 per hour

Fixed Cost = $61,640- (38,000 hours *$1.23 per hour)

= $14,900

Cost Formula = Y= $14,900+$1.23X

Part 3

Total Fixed Cost = $54,000+$14,900 = $68,900

Variable Cost per hour = $1.5+$1.23 = $2.73 per hour

Cost Formula = Y= $68,900+$2.73X

Part 4

Total overhead cost at activity level of 43,000 machine hours

= $68,900+($2.73*43,000)

= $186,290