Question

Nova Company's total overhead cost at various levels of activity are presented below: Month April May Tune July Machine Hours 49,000 39,000 59,000 69,000 Total Overhead Cost $ 183,110 $ 158,210 $ 208,010 $ 232,910 Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 39,000 machine-hour level of activity is: Utilities (variable) Supervisory salaries (fixed) Maintenance (mixed) Total overhead cost $ 54,600 45,000 58,610 $ 158,210 Nova Company's management wants to break down the maintenance cost into its variable and fixed cost elements Required: 1. Estimate how much of the $232,910 of overhead cost in July was maintenance cost. (Hint to do this, it may be helpful to first determine how much of the $232,910 consisted of utilities and supervisory salarles. Think about the behavior of variable and fixed costs.) 2. Using the high-low method, estimate a cost formula for maintenance in the form Y = a + bx. 3. Express the company's total overhead cost in the form Y = a +bX. 4. What total overhead cost would you expect to be incurred at an activity level of 44.000 machine-hours? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Estimate how much of the $232,910 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $232.910 consisted of utilities and supervisory salaries. Think about the behavior of variable and fixed costs.) (Do not round intermediate calculations.) Maintenance cost in July Required 2 >

Answer 1

Solution:

1)Maintenance cost at 69,000 hours can be isolated as follows

	39,000 MH's	69,000 MH's
Toatl factory overhead cost	158,210	232,910
Less:
Utilites cost($1.4 per machine hour)	54,600	96,600
Supervisior salaries	45,000	45,000
Maintenance cost	58,610	91,310

Utilities cost per machine hour = 54,600 / 39,000 = $1.4 per machine hour

2)

	Machine hours	Maintenance cost
High level of activity	69,000	91,310
Low level of activity	39,000	58,610

variable rate = change in cost / chnage in activity

= (91,310 - 58,610)/(69,000 - 39,000)

=1.09 per machine hour

Total fixed cost
Total maintenance cost	91,310
Less: Variable cost element
(69,000 * 1.09)	75,210
Fixed cost element	16,100

Therefore equation is Y = $16,100+$1.09X

3)

	variable rate per machine hour	Fixed cost
Utilities cost	1.4
Supervisiors salaries		45,000
Maintenance cost	1.09	16,100
Toatl overhead cost	2.49	61,100

Hence equation is Y = 61,100+2.49X

4)At an activity level of 44,000 Mhr we have

Total overhead cost = 61,100+2.49*44,000 =170.660