Question

XYZ Company uses the formula y = a + bX to predict and analyze overhead costs. In the previous year, XYZ used $1,750 per month for the a factor and $0.35 for the b factor in applying overhead. XYZ has used direct labour hours in the past, but is wondering whether overhead behaviour is more closely associated with machine hours. The following data have been generated for consideration: Month Machine Hours Overhead Costs 1 466 $2,785 2 479 $3,069 3 405 $2,456 4 484 $2,888 5 508 $2,804 6 418 $2,515 Determine the fixed and variable values, using machine hours. (Round variable cost to 2 decimal places, e.g. 15.25 and fixed cost to 0 decimal places, e.g. 525). Fixed Cost $ Variable Cost $ per machine hour

Answer 1

Calculation of Variable cost:

High level activity cost = cost at 508 machine hours =$2804

Low level activity cost = cost at 405 machine hours = $2456

Variable cost =(Cost at high activity level – Cost at low activity level) / (High activity level – low activity level) = ($2804-$2456) / (508 hour – 405 hour) = $348/103 =$ 3.38 per machine hour

Calculation of Fixed cost:

We can find fixed cost using the variable cost per machine hour at the high level of activity

Variable cost at high activity level = Variable cost per machine hour x Machine hours = $3.38 x 508 =$1717.04

Fixed cost = Total cost at high activity level – variable cost at high activity level =$2804 - $1717.04 =$1086.96 rounded to $1087

Conclusion

Variable cost per machine hour = $3.38

Fixed cost -$1087