978-0-07-802542-6 PROBLEM 2-21 PAGE 60 PROBLEM 2–21 High-Low Method; Predicting
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Question
978-0-07-802542-6
PROBLEM 2-21 PAGE 60
PROBLEM 2–21 High-Low Method; Predicting Cost [ LO 2–3 , LO 2–4 ]
Golden Company’s total overhead cost at various levels of activity are presented below:
Month Machine-Hours Total Overhead Cost
March . . . . . . . . . . . . . . . . . . . . . 50,000 $194,000
April . . . . . . . . . . . . . . . . . . . . 40,000 $170,200
May . . . . . . . . . . . . . . . . . . . . . 60,000 $217,800
June . . . . . . . . . . . . . . . . . . . . . . . . . 70,000 $241,600
Assume that the overhead cost above consists of utilities, supervisory salaries, and maintenance.
The breakdown of these costs at the 40,000 machine-hour level of activity is as follows:
PROBLEM 2–21 High-Low Method; Predicting Cost [ LO 2–3 , LO 2–4 ]
Golden Company’s total overhead cost at various levels of activity are presented below:
Month Machine-Hours Total Overhead Cost
March . . . . . . . . . . . . . . . . . . . . . 50,000 $194,000
April . . . . . . . . . . . . . . . . . . . . 40,000 $170,200
May . . . . . . . . . . . . . . . . . . . . . 60,000 $217,800
June . . . . . . . . . . . . . . . . . . . . . . . . . 70,000 $241,600
Utilities (variable) . . . . . . . . . . . . . . . . . $ 52,000
Supervisory salaries (fi xed) . . . . . . . . . 60,000
Maintenance (mixed) . . . . . . . . . . . . . . 58,200
Total overhead cost . . . . . . . . . . . . . . . $170,200
The company wants to break down the maintenance cost into its variable and fixed cost elements.
Required:
1. Estimate how much of the $241,600 of overhead cost in June was maintenance cost. (Hint:
To do this, it may be helpful to first determine how much of the $241,600 consisted of utilities
and supervisory salaries. Think about the behavior of variable and fixed costs within the
relevant range.)
2. Using the high-low method, estimate a cost formula for maintenance.
3. Express the company’s total overhead cost in the form Y 5 a 1 bX.
4. What total overhead cost would you expect to be incurred at an activity level of 45,000
machine-hours?
Explanation / Answer
1. Estimate how much of the $241,600 of overhead cost in June was maintenance cost. (Hint: To do this, it may be helpful to first determine how much of the $241,600 consisted of utilities and supervisory salaries. Think about the behavior of variable and fixed costs within the relevant range.) (Do not round intermediate calculations.)
241,600 total costs
- 60,000 supervisor cost (all fixed)
- 91,000 ($52,000 / 40,000 hrs. x 70,000 hrs.) utilities (all variable)
= $90,600 maintenance cost
2. Using the high-low method, estimate a cost formula for maintenance. (Round the "Variable cost per unit" to 2 decimal places and "Fixed cost" to the nearest dollar amount.)
High . . . .June. . . . 70,000 . . . . 90,600
Low . . . . April . . . .40,000 . . . . 58,200
= . . . . . . . . . . . . . 30,000 . . . . 32,400
32,400 / 30,000 = $1.08 variable cost per hour
90,600 - (70,000 x $1.08) = $15,000 fixed costs
Cost formula
y = 15,000 + 1.08x
3.
($241,600-$170,200)/(70,000 -40,000 )=2.38
$170,200-(2.38(40000))=75000
4.
Y = 75000 + 2.38 X
Y=75000+2.38(45,000) = 182100
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