The Tree Wood Products manufactures small tables. The overhead incurred in manuf

Question

The Tree Wood Products manufactures small tables. The overhead incurred in manufacturing the tables has both a fixed component and a variable component. The company's management wishes to explain variable overhead as a percentage of direct labor costs. Management has obtained the following cost data pertaining to the production of the small tables:

Compute the fixed and variable components of the overhead costs using the high-low method (show all work)

Units Produced Direct Labor Costs Overhead Costs 300 3200 2400 400 5000 2600 1000 8000 6000 600 5400 2800 100 2400 2200

Explanation / Answer

Highest Activity Level : Units Produced = 1,000 ; Overhead Cost = $6,000

Lowest Activity Level : Units Produced = 100 ; Overhead Cost = $2,200

Variable cost per unit = Change in total cost / Change in level of activity.

$ 6000 -$2,200 / 1,000 - 100 = $4.22 per unit

Now to compute Fixed cost we need to use the variable cost per unit in total overhead cost formula for say highest level of activity.

Total overhead cost = Fixed cost + Variable cost ; $6,000 = Fixed cost + $4.22 *1000

Fixed Cost = $6,000 - $4,220 = $1,780

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