PROBLEM 2-20 High-Low Method; Predicting Cost LO 2-4, LO 2-51 Nova Company\'s to
ID: 341827 • Letter: P
Question
PROBLEM 2-20 High-Low Method; Predicting Cost LO 2-4, LO 2-51 Nova Company's total overhead cost at various levels of activity are presented below: Total Month Machine-Hours Overhead Cos April. May June July.... 70,000 60,000 80,000 90,000 $198,000 $174,000 $222,000 $246,000 Assume that the total overhead cost above consists of utilities, supervisory salaries, and main tenance. The breakdown of these costs at the 60,000 machine-hour level of activity is: Utlities (variable) Maintenance (mixed). .. $ 48,000 21,000 105,000 $174,000 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 S246,000 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $246,000 consisted of utilities and supervisory salaries. Think about the behavior of variable and fixed costs!) Using the high-low method: estimate a cost formula for maintenance Express the company's total overhead cost in the linear equation form Y a + bX. 2. 4. What total overhead cost would you expect to be incurred at an activity level of 75.000 machine-hours?Explanation / Answer
1. Maintenance cost out of $ 246,000 in July was:
Working Note: a) Utilities cost per unit (Variable):
At 60,000 hour capacity, utilities cost = $ 48,000
Hence, per machine hour = $ 48000 / 60,000 = $ 0.8
Therefore, Maintenance cost at 90,000 machine hour, when total cost is $ 246,000 is as follows:
= Total overhead cost – Utilities cost – Supervisory salaries
=$ 246,000 – (90,000 x 0.8) - $ 21,000
= $ 153,000
2. Cost formula for maintenance using High-low method:
Maintenance cost at 60,000 capacity = $ 105,000
Maintenance cost at 90,000 capacity = $ 153,000
Using High-Low method = Change in cost at different activity levels
Change in activity level
= 153,000 – 105,000
90,000 – 60,000
= $ 1.6
Hence in Maintenance cost variable portion is $ 1.6 whereas fixed portion is as follows:
Fixed portion = Total Maintenance cost -Variable portion
= 105,000 – (60,000 x 1.6)
= $ 9,000
Cost formula for maintenance = Y = a + bX
Hence, Y = 9,000 + 1.6X
3. Company’s Total overheads cost in linear equation of Y = a + bX:
Total fixed cost = 21,000 + 9,000 = 30,000
Total Variable cost = 0.8 + 1.6 = 2.4
Hence, Y = 30,000 + 2.4X
4. Total overheads cost at activity level of 75000
Total overheads cost (Y = 30,000 + 2.4X) = 30,000 + 2.4 (75,000)
= $ 210,000
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.