Question

Audio Zone Co. needs to prepare pro forma financial statements for the next fiscal year. To do so, the company must forecast its total overhead cost. The actual machine hours and total overhead cost are presented below for the past six months.

Month Total Overhead Machine Hours
Jan. $6,288 1,980
Feb. 6,460 2,090
Mar. 5,987 1,745
Apr. 5,559 1,560
May 6,032 1,865
June 6,341 2,012
Using the high-low method, total monthly fixed overhead cost is calculated to be:________.

Answer 1

$2,907

Step-by-step explanation:

the formulas to calculate costs using the high-low method are:

• variable cost = (highest activity cost - lowest activity cost) / (highest activity units - lowest activity units)
• fixed costs = highest activity cost - (variable cost per unit x highest activity units)

variable cost = ($6,460 - $5,559) / (2,090 - 1,560) = $901 / 530 units = $1.70 per unit

fixed costs = $6,460 - ($1.70 x 2,090) = $6,460 - $3,553 = $2,907