Assume that the total overhead cost above consists of utilities, supervisory sal

Question

Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 36,000 machine-hour level of activity is:

Nova Company’s management wants to break down the maintenance cost into its variable and fixed cost elements.

Nova Company’s total overhead cost at various levels of activity are presented below: Required: 1. Estimate how much of the $216,900 of overhead cost in July was maintenance cost. (Hint: To do this, it may be helpful to first determine how much of the $216,900 consisted of utilities and supervisory salaries. Think about the behavior of variable and fixed costs!) (Do not round intermediate calculations.) aintenance cost in July 2. 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.) Machine-Maintenance Hours Cost High activity level Low activity level Change Variable cost element per MH Fixed cost element

Explanation / Answer

1)Utilities cost per unit at 36000 machine hour = 43200 / 36000 = $ 1.2 per machine hour .

Variable cost remain same in per unit and fixed cost remain same in totality

Maintenance cost for july = Total -Utilities -supervision cost

                                 = 216900 - (1.2 *66000) - 47000

                                 = 90700

2)High activity    66000     90700

Low activity        36000      56200

change             30000      34500

Variable cost = 34500/ 30000 = $ 1.15 per MH

Fixed cost at high activity = 90700 - (1.15* 66000) = 14800

3)Total variable cost = 1.2 + 1.15 = 2.35 per MH

Total fixed cost = 47000 + 14800 = 61800

Y = 61800+ 2.35B

4)Total overhead cost at 41000 MH = 61800 + (2.35*41000)

                          = 61800 + 96350

                         = 158150

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