Assume that the total overhead cost above consists of utilities, supervisory sal
ID: 2425660 • Letter: A
Question
Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 38,000 machine-hour level of activity is:
Nova Company’s management wants to break down the maintenance cost into its variable and fixed cost elements.
Estimate how much of the $249,160 of overhead cost in July was maintenance cost. (Hint: To do this, it may be helpful to first determine how much of the $249,160 consisted of utilities and supervisory salaries. Think about the behavior of variable and fixed costs!) (Do not round intermediate calculations.)
Using the high-low method, estimate a cost formula for maintenance. (Do not round your intermediate calculations. Round the "Variable cost per unit" to 2 decimal places.)
Express the company’s total overhead cost in the linear equation form Y = a + bX. (Do not round your intermediate calculations. Round the "Variable cost per unit" to 2 decimal places.)
What total overhead cost would you expect to be incurred at an activity level of 43,000 machine-hours? (Do not round intermediate calculations.)
Nova Company’s total overhead cost at various levels of activity are presented below:
Explanation / Answer
WN-1) DETERMINATION OF UTILITIES COST PER HOURS AND VARIABLE MAINTENANCE COST PER HOURS-
AT 38000 HOURS
1) UTILITIES COST( VARIABLE) = $45600 i.e ($45600/ 38000) = $ 1.20 PER HOUR
2) SUPERVISORY SALARY ( FIXED) = $ 68000
3) MAINTENANCE COST(SEMI VARIABLE) =$ 62960
THEREFORE, AT 68000 HOURS-
1) UTILITIES COST = (68000 X 1.20)= $ 81600
2) SUPERVISORYSALARY= $ 68000
3) MAITENANCE COST = $(249160 - 81600 - 68000) = $ 99560
ANSWER 1) THEREFORE OUT OF TOTAL OVERHEAD OF $ 249160 FOR THE MONTH OF JULY, MAINTENANCE COST IS $ 99560 (WN-1)
ANSWER 2) DETERMINATION OF COST FORMULA FOR MAINTENANCE USING HIGH-LOW METHOD
THE VARIABLE PART OF MAINTENANCE COST PER HOUR IS (AS PER HIGH LOW METHOD) = CHANGE IN TOTAL MAINTENANCE COST / CHANGE IN TOTAL HOURS= $(99560 -62960) / (68000-38000) = $ 1.22 PER HOUR
THEREFORE FIXED PART OF MAINTENANCE COST= $ 99560- ( $ 1.22 X 68000 HRS) OR $ 62960 - ($ 1.22 X 38000 HRS) i.e $ 16600
THEREFORE COST FORMULA FOR MAINTENANCE IS -
Y = a + bX WHERE Y= TOTAL MAINTENANCE COST, a = FIXED MAINTENANCE COST, b= MAINTENANCE COST PER HOUR AND X = TOTAL HOURS
COST FORMULA-
Y = $ 16600 + $ 1.22 X
ANSWER 3) COMPANY'S TOTAL OVERHEAD COST IN LINEAR EQUATION FORM-
AS PER WN-1) TOTAL VARIABL COST PER HOUR
- UTILITIES COST = $ 1.20
- MAINTENANCE COST = $ 1.22
TOTAL = $ 2.42 PER HOUR (b)
AS PER WN-1) TOTAL FIXED OVERHEAD COST
-SUPERVISORY = $ 68000
-MAINTENANCE = $ 16600
TOTAL FIXED COST = $ 84600 (a)
THEREFORE TOTAL OVERHEAD IN LINEAR EQUATION FORM -
Y = $84600 + $ 2.42 X
ANSWER 4) TOTAL OVERHEAD COST AT AN ACTIVITY LEVEL OF 43000 MACHINE HOUR-
UTILITIES COST @ $ 1.20 PER HOUR = $ 51600
SUPERVISORY SALARY( FIXED) = $ 68000
MAINTENANCE COST-
- FIXED = $ 16600 (WN-1)
-VARIABLE @ $ 1.22 PER HOUR = $ 52460 (WN-1)
THEREFORE TOTAL OVERHEAD COST = $ 188660
HOURS TOTAL MAINTENANCE COST ( SEMI VARIABLE) 38000-LOW $62960 68000-HIGH $99560