Question

Based on the following for the first six months:

	Direct Labor Hours	Manufacturing Overhead
July	45,000	$295,000
August	60,000	$320,000
September	57,000	$323,000
October	52,000	$247,250
November	34,000	$178,200
December	25,000	$162,500

Required:

1. Use the high-low method to estimate the cost formula
2. Estimate the total overhead cost at an activity level of 48,000 machine hours, using the separate estimates you obtained for its components.

Answer 1

Required 1 :
	Direct labor hours	Manufacturing overhead
High level of activity [ August ]	60000	320000
(-) Low level of activity [ December ]	25000	162500
Difference	35000	157500

Variable cost per direct labor hour = Difference in Manufacturing overhead / Difference in direct labor hours = 157500 / 35000	4.5
Now let us calculate the fixed manufacturing overhead from the data of high level of activity
Total manufacturing cost = ( Variable cost per direct labor hours * Direct labor hours ) + Fixed manufacturing overhead
320000 = ( 60000 * 4.5 ) + Fixed manufacturing overhead
320000 = 270000 + Fixed manufacturing overhead
Fixed manufacturing overhead = 320000 - 270000	50000
Cost formula :
Y = 50000 + 4.5X

Required 2 :
Total overhead cost = 50000 + 4.5X
Total overhead cost = 50000 + 4.5*48000	266000