Question

Fountainhead produces agricultural irrigation equipment. During a​ year, the amount of overhead costs on a​ per-month basis varies in relation to the machine hours used in a given year. The low for the past year was 4,590 ​hours, and the expense associated was ​$113,670. The high for the period was 6,900 ​hours, and the associated expense was ​$150,117. During the low​ month, the ​$113,670 in overhead costs consisted of indirect materials of ​$68,850 ​(a variable​ expense), rent of ​$34,250 ​(a fixed​ expense), and maintenance costs of ​$10,570 ​(a mixed​ expense).

1.	Given the breakdown of expenses in the low​ period, what are the estimated costs for​ (a) indirect​ materials, (b)​ rent, and​ (c) maintenance during the high​period?
2.	What is the cost function for maintenance​ costs?
3.	What amount of maintenance costs would be expected with 7,600 machine hours of​ work?
4.	What would be the total overhead costs at 7,600 machine​ hours?

Please show the calculations.

Answer 1

1.

		High Period
a.	Indirect materials ( 68,850 / 4,590 MH * 6,900 MH )	$ 103,500
b.	Rent	34,250
c.	Maintenance cost ( plug value )	12,367
	Total overhead cost	$ 150,117

2. Variable maintenance cost per machine hour = Change in Cost / Change in Machine Hours = $ ( 12,367 - 10,570 ) / ( 6,900 - 4,590 ) = 1,797 / 2,310 = $ 0.78 per MH

Fixed cost = $ 12,367 - $ ( 6,900 x 0.78 ) = $ 6,985

Cost function : y = 0.78 x + 6,985

3. With 7,600 machine hours of work, expected maintenance cost = 7,600 x $ 0.7779 + $ 6,985 = $ 12,913 approx.

4.

	Activity Level : 7,600 Machine Hours
Indirect materials ( $ 68,850 / 4,590 * 7,600)	$ 114,000
Rent	34,250
Maintenance cost	12,913
Total overhead cost	$ 161,163