| Golden Company’s total overhead cost at various levels of activity are presented below: |
| Month | Machine-Hours | Total Overhead Cost |
| March | 52,000 | $207,500 |
| April | 42,000 | $182,000 |
| May | 62,000 | $233,000 |
| June | 72,000 | $258,500 |
Assume that the overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 42,000 machine-hour level of activity is as follows:
|
| Utilities (variable) | $ | 58,800 |
| Supervisory salaries (fixed) | 60,000 | |
| Maintenance (mixed) | 63,200 | |
| Total overhead cost | $ | 182,000 |
| The company wants to break down the maintenance cost into its variable and fixed cost elements. |
| Required: |
| 1. |
Estimate how much of the $258,500 of overhead cost in June was maintenance cost. (Hint: To do this, it may be helpful to first determine how much of the $258,500 consisted of utilities and supervisory salaries. Think about the behavior of variable and fixed costs within the relevant range.)(Do not round intermediate calculations. Omit the "$" sign in your response.)
|
| Maintenance cost in June | $ |
| 2. |
Using the high-low method, estimate a cost formula for maintenance. (Round the "Variable cost per unit" to 2 decimal places and "Fixed cost" to the nearest dollar amount. Omit the "$" sign in your response.)
|
| Y | = | $ | + | $ | X |
| 3. |
Express the company’s total overhead cost in the form Y = a + bX. (Round the "Variable cost per unit" to 2 decimal places and "Fixed cost" to the nearest dollar amount. Omit the "$" sign in your response.)
|
| Y | = | $ | + | $ | X |
| 4. |
What total overhead cost would you expect to be incurred at an activity level of 47,000 machine-hours? (Do not round intermediate calculations. Omit the "$" sign in your response.)
|
| Total overhead cost | $ |
Explanation:
1.
2.
3.
4.
| Maintenance cost at the 72,000 machine-hour level of activity can be isolated as follows: |
| Level of Activity | ||||
| 42,000 MH | 72,000 MH | |||
| Total factory overhead cost | $ | 182,000 | $ | 258,500 |
| Deduct: | ||||
| Utilities cost @ $1.40 per MH* | 58,800 | 100,800 | ||
| Supervisory salaries | 60,000 | 60,000 | ||
| Maintenance cost | $ | 63,200 | $ | 97,700 |
*$58,800 ÷ 42,000 MHs = $1.40 per MH
|
2.
| High-low analysis of maintenance cost: |
| Machine Hours | Maintenance Cost | |
| High activity level | 72,000 | $ 97,700 |
| Low activity level | 42,000 | 63,200 |
| Change | 30,000 | $ 34,500 |
| Variable cost per unit of activity: |
Change in cost
| = |
$34,500
| = | $1.15 per MH |
| Change in activity | 30,000 MHs |
| Total fixed cost: |
| Total maintenance cost at the low activity level | $ | 63,200 |
| Less the variable cost element (42,000 MHs × $1.15 per MH) | 48,300 | |
| Fixed cost element | $ | 14,900 |
Therefore, the cost formula is $14,900 per month plus $1.15 per machine-hour or
Y = $14,900 + $1.15X |
3.
| Variable Rate per Machine-Hour | Fixed Cost | |
| Maintenance cost | $ 1.15 | $ 14,900 |
| Utilities cost | 1.40 | |
| Supervisory salaries cost | 60,000 | |
| Totals | $ 2.55 | $ 74,900 |
Thus, the cost formula is: Y = $74,900 + $2.55X.
|
4.
Total overhead cost at an activity level of 47,000 machine-hours:
|
| Fixed cost | $ | 74,900 |
| Variable costs: $2.55 per MH × 47,000 MHs | 119,850 | |
| Total overhead costs | $ | 194,750 |
