Question

Abc company's total overhead costs at various levels of activity are presented below: month machine hours total overhead costs march 60,000 $216,800 April 50,000 194,000 May 70,000 239,600 June 80,000 262,400 assume that the overhead costs above consist of utilities, supervisory salaries, and maintenance. at the 50,000 machine-hour level of activity, these costs are utilities (v) $54,000 supervisory salaries (f) 70,000 maintenance (m) 70,000 total overhead costs $194,000 v = variable; f = fixed; m = mixed. the company wants to break down the maintenance cost into its basic variable and fixed cost elements. required:

a. estimate the maintenance cost for June.
b. use the high-low method to estimate the cost formula for maintenance cost.
c. estimate the total overhead cost at an activity level of 55,000 machine hours.

Answer 1

To estimate the maintenance cost for June, we can use the high-low method. For part b, to use the high-low method to estimate the cost formula for maintenance cost, we use the data for May and April. Finally, for part c, to estimate the total overhead cost at an activity level of 55,000 machine hours, we can use the cost formula.

Step-by-step explanation:

To estimate the maintenance cost for June, we can use the high-low method. First, we need to find the variable cost per machine hour. We can do this by finding the change in total cost and dividing it by the change in machine hours between two months. Using the data for May and April, we have a change in total cost of $262,400 - $239,600 = $22,800 and a change in machine hours of 70,000 - 50,000 = 20,000. Dividing the change in cost by the change in machine hours gives us the variable cost per machine hour: $22,800 / 20,000 = $1.14 per machine hour.

Next, we can find the fixed cost component of maintenance by using any of the given months. Let's use April, where the total overhead cost is $194,000 and the variable cost for utilities and supervisory salaries is $54,000 + $70,000 = $124,000. Subtracting the variable cost from the total overhead cost, we get the fixed cost: $194,000 - $124,000 = $70,000.

Now, to estimate the maintenance cost for June at an activity level of 80,000 machine hours, we can use the cost formula: Total cost = Fixed cost + (Variable cost per machine hour x Machine hours). Plugging in the values, we have: Total cost = $70,000 + ($1.14 x 80,000) = $157,200.

For part b, to use the high-low method to estimate the cost formula for maintenance cost, we use the data for May and April. We already have the variable cost per machine hour, which is $1.14. Now, we need to find the fixed cost. Using the formula: Fixed cost = Total cost - (Variable cost per machine hour x Machine hours), we can plug in the values for May: Fixed cost = $239,600 - ($1.14 x 70,000) = $161,200. Therefore, the cost formula for maintenance cost is: Total cost = $161,200 + ($1.14 x Machine hours).

Finally, for part c, to estimate the total overhead cost at an activity level of 55,000 machine hours, we can use the cost formula: Total cost = Fixed cost + (Variable cost per machine hour x Machine hours). Plugging in the values, we have: Total cost = $70,000 + ($1.14 x 55,000) = $132,700.