Nova Company\'s total overhead cost at various levels of activity are presented

Question

Nova Company's total overhead cost at various levels of activity are presented below:

Month Machine Hours Overhead Cost
April 45,000 $ 167,500
May 36,000 $ 145,180
June 54,000 $ 189,820
July 63,000 $ 212,140

Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 36,000 machine-hour level of activity is:

Utilities (variable) $ 46,800
Supervisory salaries (fixed) 43,000
Maintenance (mixed) 55,380

Total overhead cost $ 145,180

Nova Company's management wants to break down the maintenance cost into its variable and fixed cost elements.

Requirement 1:
Estimate how much of the $212,140 of overhead cost in July was maintenance cost.

Requirement 2:
Using the high-low method, estimate a cost formula for maintenance.

Requirement 3:
Express the company's total overhead cost in the linear equation form Y = a +bX.

Requirement 4:
What total overhead cost would you expect to be incurred at an operating activity level of 39,600 machine-hours?

Explanation / Answer

Requirement 1:
Estimate how much of the $212,140 of overhead cost in July was maintenance cost.

Maintenance costs/total costs = 55,380/145,180 = 38.146% at 36,000

Estimated for July: 212,140*38.146% = 80923

Answer: $80,923

Requirement 2:
Using the high-low method, estimate a cost formula for maintenance.

Slope coefficient: (80923 – 55,380)/(63,000-36,000) = 25,543/27,000 = 0.946

Subsitute either high or low values. Using low, it would be:

Y – 55,380 = 0.946*(x – 36,000)

Y = 0.946x – 34056+ 55,380

Answrer: Y = 0.946x + 21,324

Requirement 3:
Express the company's total overhead cost in the linear equation form Y = a +bX.

Slope coefficient = (212,140 – 145,180)/(63,000 – 36,000) = 66,960/27,000 = 2.48

Choose either high values or low values. Choosing low will give you:

Y – 145,180 = 2.48 (x – 36,000)

Y = 2.48X – 89,280 + 145,180

Answer: Y = 2.48X + 55,900

Requirement 4:
What total overhead cost would you expect to be incurred at an operating activity level of 39,600 machine-hours?

2.48*39,600 + 55,900 = 154,108

Answer: 154,108

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