Nova Company’s total overhead cost at various levels of activity are presented b
ID: 2609167 • Letter: N
Question
Nova Company’s total overhead cost at various levels of activity are presented below: Month Machine- Hours Total Overhead Cost April 49,000 $ 212,110 May 39,000 $ 186,210 June 59,000 $ 238,010 July 69,000 $ 263,910 Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 39,000 machine-hour level of activity is: Utilities (variable) $ 58,500 Supervisory salaries (fixed) 70,000 Maintenance (mixed) 57,710 Total overhead cost $ 186,210 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 $263,910 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $263,910 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 44,000 machine-hours?
Explanation / Answer
1. Maintenance cost at the 69,000 machine-hour level of activity can be isolated as follows
* 58500 / 39000 = 1.5
2. High-low analysis of maintenance cost:
Variable cost per unit of activity: = Change in cost / Change in activity
= 32700 / 30000
= 1.09 Per MH
Total fixed cost=
Therefore, the cost formula is $15,200 per month plus $1.09 per machine-hour or
Y = $15,200 + $1.09X
3.
Total overhead cost at an activity level of 44,000 machine-hours:
Level Of Activity 39000 MH 69000 MH Total factory overhead cost 186210 263910 Deduct Utilities cost @ $1.50 per MH* 58500 103500 Supervisory salaries 70000 70000 Maintenance cost 57710 90410Related Questions
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