Question

Dundar Mifflin makes electronic products for the RCMP. The following data is for the first six months:

Direct Labor Hours Manufacturing Overhead
January 45,000 $295,000
February 65,000 $309,000
March 57,000 $323,000
April 58,000 $320,000
May 25,000 $181,000
June 29,000 $162,500

Required:
1. Use the high-low method to estimate the cost formula











2. Estimate the total overhead cost at an activity level of 40,000 machine hours, using the separate estimates you obtained for its components.

Answer 1

1)

Cost formula using High-Low method:

Variable Cost = (High Cost - Low Cost) / (High Machine Hours - Low Machine Hours)

= ($323,000 - $162,500 / (65,000 machine hours - 25,000 machine hours)

= $160,500 / 30,000 machine hours

= $5.35 per machine hour

Fixed Cost = ($162,500 - [$5.35 per machine hour * 25,000 machine hours])

= $162,500 - $133,750

= $28,750

The cost formula = Fixed Cost + (Machine Hours * Variable Cost Per Unit)

= $28,750 + (Machine Hours * $5.35 per machine hour).

2)

Total overhead cost at an activity level of 40,000 machine hours -

Total overhead cost = Fixed Cost + (40,000 machine hours * Variable Cost Per Machine Hour)

= $28,750 + (40,000 machine hours * $5.35per machine hour)

= $28,750 + $214,000

= $242,750

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