Nova Company’s total overhead cost at various levels of activity are presented below: Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance

Nova Company’s total overhead cost at various levels of activity are presented below:

Month	Machine-Hours	Total Overhead Cost
April	70,000	$198,000
May	60,000	$174,000
June	80,000	$222,000
July	90,000	$246,000

Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 60,000 machine-hour level of activity is:

Utilities (variable)	$	48,000
Supervisory salaries (fixed)		21,000
Maintenance (mixed)		105,000
Total overhead cost	$	174,000

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 $246,000 of overhead cost in July was maintenance cost.(Hint: to do this, it may be helpful to first determine how much of the $246,000 consisted of utilities and supervisory salaries. Think about the behavior of variable and fixed costs!) (Do not round intermediate calculations.)

Explanation:

1.

Maintenance cost at the 90,000 machine-hour level of activity can be isolated as follows:

	Level of Activity
	60,000 MHs		90,000 MHs
Total factory overhead cost	$	174,000	$	246,000
Deduct:
Utilities cost @ $0.80 per MH*		48,000		72,000
Supervisory salaries		21,000		21,000
Maintenance cost	$	105,000	$	153,000

*$48,000 ÷ 60,000 MHs = $0.80 per MH

         
2.

High-low analysis of maintenance cost:

	Machine- Hours	Maintenance Cost
High activity level	90,000	$	153,000
Low activity level	60,000		105,000
Change	30,000	$	48,000

Variable rate:

Change in cost	=	$48,000	=	$1.60 per MH
Change in activity		30,000 MHs

Total fixed cost:

Total maintenance cost at the high activity level	$	153,000
Less the variable cost element       (90,000 MHs × $1.60 per MH)		144,000
Fixed cost element	$	9,000

Therefore, the cost formula for maintenance is $9,000 per month plus $1.60 per machine-hour or Y = $9,000 + $1.60X

       
3.

	Variable Rate per Machine-Hour	Fixed Cost
Utilities cost	$ 0.80
Supervisory salaries cost		$ 21,000
Maintenance cost	1.60	9,000
Total overhead cost	$ 2.40	$ 30,000

Thus, the cost formula would be: Y = $30,000 + $2.40X.

    
4.

Total overhead cost at an activity level of 75,000 machine-hours:

         

Fixed cost	$	30,000
Variable costs: 75,000 MHs × $2.40 per MH		180,000
Total overhead costs	$	210,000