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

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

Month	Machine- Hours			Total Overhead Cost
April		46,000		$	179,040
May		36,000		$	156,140
June		56,000		$	201,940
July		66,000		$	224,840

Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 36,000 machine-hour level of activity is:

Utilities (variable)	$	43,200
Supervisory salaries (fixed)		59,000
Maintenance (mixed)		53,940
Total overhead cost	$	156,140

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 $224,840 of overhead cost in July was maintenance cost. 

(Hint: to do this, it may be helpful to first determine how much of the $224,840 consisted of utilities and supervisory salaries. Think about the behavior of variable and fixed costs.)

2. Using the high-low method, estimate a cost formula for maintenance in the form Y = a + bX.

3. Express the company’s total overhead cost in the form Y = a + bX.

4. What total overhead cost would you expect to be incurred at an activity level of 41,000 machine-hours?

Explanation

1.

Maintenance cost at the 66,000 machine-hour level of activity can be isolated as follows:

	Level of Activity
	36,000 MHs			66,000 MHs
Total factory overhead cost	$	156,140		$	224,840
Deduct:
Utilities cost @ $1.20 per MH*		43,200			79,200
Supervisory salaries		59,000			59,000
Maintenance cost	$	53,940		$	86,640

*$43,200 ÷ 36,000 MHs = $1.20 per MH

2.

High-low analysis of maintenance cost:

	Machine- Hours		Maintenance Cost
High activity level	66,000		$	86,640
Low activity level	36,000			53,940
Change	30,000		$	32,700

Variable rate:

Change in cost	=	$32,700	=	$1.09 per MH
Change in activity		30,000 MHs

Total fixed cost:

Total maintenance cost at the high activity level	$	86,640
Less the variable cost element
(66,000 MHs × $1.09 per MH)		71,940
Fixed cost element	$	14,700

Therefore, the cost formula for maintenance is $14,700 per month plus $1.09 per machine-hour or

Y = $14,700 + $1.09X.

3.

	Variable Cost per Machine-Hour					Fixed Cost
Utilities cost		$	1.20
Supervisory salaries cost						$	59,000
Maintenance cost			1.09				14,700
Total overhead cost		$	2.29			$	73,700

Thus, the cost formula would be: Y = $73,700 + $2.29X.

4.

Total overhead cost at an activity level of 41,000 machine-hours:

Fixed cost	$	73,700
Variable costs: 41,000 MHs × $2.29 per MH		93,890
Total overhead costs	$	167,590

Thanks