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 35,000 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 $225,300 of overhead cost in July was maintenance cost. (Hint: To do this, it may be helpful to first determine how much of the $225,300 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 40,000 machine-hours? (Do not round intermediate calculations.)

Explanation / Answer

Q - 1)

July .........we have 65000 hours.

Variable cost per hour =45500 / 35000 = 1.3

So variable cost (july) = 65000 * 1.3 = 84500

Fixed cost (July) = Fixed cost (may) = 44000

Maintenance cost (July) = Total cost - Variable cost - Fixed cost

= 225300 - 84500 - 44000 = 96800 .... final answer

Question - 2

Cost formula for maintenance = Variable cost per hour * Number of hours + Fixed cost

= 1.24X + 16200 ................. final answer

Variable cost per hour = Difference in Cost / Difference in hours = ( 96800 - 59600) / ( 65000 - 35000)

= 37200 / 30000 = 1.24 per hour

Fixed cost = 59600 - 35000 * 1.24 = 16200

Question - 3

Y = a + bX = 60,200 + 2.54 X .............final answer

a = Fixed cost = 44000 + 16200 = 60200

b = 1.30 + 1.24 = 2.54 per hour

Question - 4

Total over head cost at 40000 hours

= 60200 + 2.54 * 40000 = 161800 .............. final answer

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