Nova Company’s total overhead cost at various levels of activity are presented b

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Nova Company’s total overhead cost at various levels of activity are presented below: Month Machine- Hours Total Overhead Cost April 47,000 $ 182,440 May 37,000 $ 156,240 June 57,000 $ 208,640 July 67,000 $ 234,840 Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 37,000 machine-hour level of activity is: Utilities (variable) $ 55,500 Supervisory salaries (fixed) 47,000 Maintenance (mixed) 53,740 Total overhead cost $ 156,240 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 $234,840 of overhead cost in July was maintenance cost. (Hint: To do this, it may be helpful to first determine how much of the $234,840 consisted of utilities and supervisory salaries. Think about the behavior of variable and fixed costs!) (Do not round intermediate calculations.)
2. Using the high-low method, estimate a cost formula for maintenance. (Do not round your intermediate calculations. Round the "Variable cost per machine-hours" to 2 decimal places.)
Nova Company’s total overhead cost at various levels of activity are presented below: Month Machine- Hours Total Overhead Cost April 47,000 $ 182,440 May 37,000 $ 156,240 June 57,000 $ 208,640 July 67,000 $ 234,840 Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 37,000 machine-hour level of activity is: Utilities (variable) $ 55,500 Supervisory salaries (fixed) 47,000 Maintenance (mixed) 53,740 Total overhead cost $ 156,240 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 $234,840 of overhead cost in July was maintenance cost. (Hint: To do this, it may be helpful to first determine how much of the $234,840 consisted of utilities and supervisory salaries. Think about the behavior of variable and fixed costs!) (Do not round intermediate calculations.)
2. Using the high-low method, estimate a cost formula for maintenance. (Do not round your intermediate calculations. Round the "Variable cost per machine-hours" to 2 decimal places.)
Nova Company’s total overhead cost at various levels of activity are presented below: Month Machine- Hours Total Overhead Cost April 47,000 $ 182,440 May 37,000 $ 156,240 June 57,000 $ 208,640 July 67,000 $ 234,840 Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 37,000 machine-hour level of activity is: Utilities (variable) $ 55,500 Supervisory salaries (fixed) 47,000 Maintenance (mixed) 53,740 Total overhead cost $ 156,240 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 $234,840 of overhead cost in July was maintenance cost. (Hint: To do this, it may be helpful to first determine how much of the $234,840 consisted of utilities and supervisory salaries. Think about the behavior of variable and fixed costs!) (Do not round intermediate calculations.)
2. Using the high-low method, estimate a cost formula for maintenance. (Do not round your intermediate calculations. Round the "Variable cost per machine-hours" to 2 decimal places.)

Explanation / Answer

(1).

Utilities cost at 37000 machine hours is $55500

Thus per hour rate ($55500 / 37000) = $1.5 per hour

So utilities cost in July ($1.5 * 67000) = $100500

Supervisory salaries is fixed thus in July it will be $47000

Now let’s calculate maintenance cost;

Maintenance cost in July;

$234840 – $47000 – $100500) = $87340

(2).

Maintenance cost at high level in July $87340

Maintenance cost at low level in May $53740

Thus variable maintenance cost per hour ($87340 – $53740) / (67000 – 37000)

= $33600 / 30000 = $1.12

Fixed maintenance cost $87340 – ($1.12 * 67000)

= $87340 – $75040 = $12300

So cost formula for maintenance cost will be;

$12300 + $1.12 per direct labor hour

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