Question

Fol variable and fixed costs!) w Method of cost analysis estimate a cost formula for maintenance What total factory overhead costs would you expect the company to incur an operating level of 70,00 D Labour-hours? cur at an operating level of 70,000 direct PROBLEM 6-7 Applying the Hic ving the High-Low Method and Predicting Cost (LO2-CC9] Company's total overhead costs at various levels of activity follow: CHECK FIGURE (2) $9,000 per month plus $1.60 per machine-hour Month Machine Hours Total Overhead Costs April 70.000 $198.000 May 60,000 174,000 June 80,000 222,000 246,000 July 90,000 Assume that the total overhead costs consist of utilities, supervisory salaries, and maintenance. The breakdown these costs at the 60,000 machine-hour level of activity is as follows: $ 48,000 Utilities (V) 21,000 Supervisory salaries (F) 105.000 Maintenance (M) $174,000 Total overhead costs V = variable; F = fixed; M = mixed. Nova Company's management wants to break down the maintenance cost into its basic variable and fixe elements.

Answer 1

Answer 1

Maintenance cost = $ 153,000

Calculations:

Machine hours	60,000	90,000
Total cost	$ 174,000	$ 246,000
Utilities	$     48,000	$     72,000
Supervisor	$     21,000	$     21,000
Maintainence	$ 105,000	$ 153,000

Answer 2

	Lowest range	Highest range
Cost	$      105,000	$       153,000
Hours	$        60,000	$         90,000

As per High Low Method,

Variable cost per hour = Change in costs / change in hours

Variable cost per hour = (153,000-105,000)/(90,000-60,000)

Variable cost per hour = 48,000/30,000

Variable cost per hour = $ 1.6

Fixed Cost = Total Cost - Variable Cost

Fixed Cost = Total Cost - (Variable Cost per hour * hours)

Fixed Cost = 153,000-(1.6*90,000)

Fixed Cost = $ 9000

Answer 3

Total cost = ($ 9,000 + $ 21,000)+ ($ 1.6 +0.8)* Hours

Total cost = $ 30,000 + $ 2.4 * Hours

Answer 4

Total cost = $ 30,000 + $ 2.4 * Hours

= $ 30,000 + 2.4 * 75,000

= $ 210,000

In case of any doubt, please comment.