Question

Sawaya Co., Ltd., of Japan is a manufacturing company whose total factory overhead costs fluctuate considerably...

Sawaya Co., Ltd., of Japan is a manufacturing company whose total factory overhead costs fluctuate considerably from year to year according to increases and decreases in the number of direct labor-hours worked in the factory. Total factory overhead costs at high and low levels of activity for recent years are given below:

Level of Activity
Low High
Direct labor-hours 52,800 70,400
Total factory overhead costs $ 286,620 $ 328,860

The factory overhead costs above consist of indirect materials, rent, and maintenance. The company has analyzed these costs at the 52,800-hour level of activity as follows:

Indirect materials (variable) $ 95,040
Rent (fixed) 125,000
Maintenance (mixed) 66,580
Total factory overhead costs $ 286,620

To have data available for planning, the company wants to break down the maintenance cost into its variable and fixed cost elements.

Required:

1. Estimate how much of the $328,860 factory overhead cost at the high level of activity consists of maintenance cost. (Hint: To do this, it may be helpful to first determine how much of the $328,860 consists of indirect materials and rent. Think about the behavior of variable and fixed costs!) (Do not round intermediate calculations.)


2. Using the high-low method, estimate a cost formula for maintenance. (Round the Variable cost per DLH to 2 decimal places.)

Direct Labor-Hours Maintenance Cost
High level of activity
Low level of activity
Change 0 $0
Variable cost element per DLH
Fixed cost element
Y = + X

3. What total factory overhead costs would you expect the company to incur at an operating level of 58,080 direct labor-hours? (Do not round intermediate calculations.)

Business   Accounting   
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Answer #1

1. Estimate how much of the $328,860 factory overhead cost at the high level of activity consists of maintenance cost :

Indirect materials (variable) 126720
Rent (fixed) 125000
Maintenance (mixed) 77140
Total factory overhead 328860

2) estimate cost formula :

Direct Labor-Hours Maintenance Cost
High level of activity 70400 77140
Low level of activity 52800 66580
Change 17600 $10560
Variable cost element 0.60 per DLH
Fixed cost element 34900

Y = 34900+0.60X

3. What total factory overhead costs would you expect the company to incur at an operating level of 58,080 direct labor-hours?

Total factory overhead = (58080*.60+34900) = 69748

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