|
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
|
