Assume that the total overhead cost above consists of utilities, supervisory sal
ID: 2587029 • Letter: A
Question
Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 45,000 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 $251,450 of overhead cost in July was maintenance cost. (Hint: To do this, it may be helpful to first determine how much of the $251,450 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 50,000 machine-hours? (Do not round intermediate calculations.)
Question 1: Nova Company’s total overhead cost at various levels of activity are presented below:Explanation / Answer
1) Supervisor's salary (Fixed) = $50,000
Utilities for May = $63,000
Machine Hours in May = 45,000
Utilities cost per machine hour = $63,000/45,000 = $1.4 per machine hour
Total Overhead cost in July = $251,450
Maintenance cost in July = Total Overhead cost - Supervisor's Salary - Utilities cost
= $251,450 - $50,000 - ($1.4*75,000) = $251,450-$50,000-$105,000 = $96,450
2) Maintenance variable cost per machine hour = (Diff. in maintenance cost of May and July)/Diff. in Machine Hours
= (96,450-63,750)/(75,000-45,000) = $1.09 per machine hour
Maintenance Fixed Cost = Total Maintenance cost - Variable Maintenence cost = 63,750 - (45,000*1.09)
= $63,750 - $49,050 = $14,700
Cost formula for maintenance = ($1.09*Machine hours)+$14,700
3) Equation for company's total overhead cost
y = $14,700+$50,000+($1.09+$1.40)*x
y = 64,700+2.49x
Where, y = Total Overhead cost
b = Total variable cost per hour
a = Total Fixed Costs
x = Total machine hours
4) Total Overhead cost at an activity level of 50,000 machine hours can be find out by using the equation expressed in above part (3)
y = 64,700+2.49x
y = 64,700+(2.49*50,000) = 64,700+$124,500 = $189,200
Thus the total overhead cost at the activity level of 50,000 machine hours is $189,200.