Question

The following information is available regarding the total manufacturing overhead of Bursa Mfg. Co. for a recent four-month period.

	Machine- Hours			Manufacturing Overhead
January		5,300		$	310,000
February		3,200			224,000
March		4,900			263,800
April		2,700			190,000

a-1. Use the high-low method to determine the variable element of manufacturing overhead costs per machine-hour. (Round your answer to 2 decimal places.)

a-2. Use the high-low method to determine the fixed element of monthly overhead cost.

b. Bursa expects machine-hours in May to equal 5,300. Use the cost relationships determined in part a to forecast May's manufacturing overhead costs.

c. Suppose Bursa had used the cost relationships determined in part a to estimate the total manufacturing overhead expected for the months of February and March. By what amounts would Bursa have over- or underestimated these costs?

Answer 1

a1) Variable cost per machine hour = Change in Cost/Change in machine hour

= (310000-190000)/(5300-2700)

Variable cost per machine hour = 46.15 per machine hour

a2) Fixed cost = 310000-(5300*46.15) = $65405

b) Total Cost = 65405+(5300*46.15) = $310000

c) February cost under high low method = (3200*46.15+65405) = 213085 under estimated by (224000-213085) = 10915

March Cost under high low method = (4900*46.15+65405) = 291540 Over estimated by (263800-291540) = $27740