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 April May June July Machine- Hours 54,000 44,000 64,000 74,000 Total Overhead Cost $ 186,620 $ 163,320 $ 209,920 $ 233,220 Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 44,000 machine-hour level of activity is: Utilities (variable) Supervisory salaries (fixed) Maintenance (mixed) Total overhead cost $ 48,400 46,000 68,920 $163,320 Nova Company's management wants to break down the maintenance cost into its variable and fixed cost elements. Required: 1. Estimate how much of the $233,220 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $233,220 consisted of utilities and supervisory salaries. Think about the behavior of variable and fixed costs.) 2. Using the high-low method, estimate a cost formula for maintenance in the form Y = a + bx. 3. Express the company's total overhead cost in the form Y = a + bX. 4. What total overhead cost would you expect to be incurred at an activity level of 49,000 machine-hours?

Explanation / Answer

1 Maintenance cost in July=233220-46000-(48400/44000*74000)= $105820 2 Maintenance cost Machine hours High activity level 105820 74000 Low activity level 68920 44000 Change 36900 30000 Variable cost=36900/30000= $1.23 Fixed cost=105820-(74000*1.23)= $14800 Y=14800+$1.23X 3 Variable cost Fixed cost Utilities 1.1 Supervisory salaries 46000 Maintenance 1.23 14800 Total 2.33 60800 Y=60800+$2.33X 4 Total overhead cost=60800+(49000*2.33)= $174970

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