UNIT 1

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

Month Machine-Hours Total Overhead Cost

March 52,000 $207,500
April 42,000 $182,000
May 62,000 $233,000
June 72,000 $258,500

Assume that the overhead cost above consists of utilities, supervisory salaries, and maintenance. The
breakdown of these costs at the 42,000 machine-hour level of activity is as follows:

Utilities
$ 58,800
(variable)
Supervisory
60,000
salaries (fixed)
Maintenance
63,200
(mixed)

Total
$ 182,000
overhead cost

The company wants to break down the maintenance cost into its variable and fixed cost elements.

Required:
1. Estimate how much of the $258,500 of overhead cost in June was maintenance cost. (Hint: To do
this, it may be helpful to first determine how much of the $258,500 consisted of utilities and
supervisory salaries. Think about the behavior of variable and fixed costs within the relevant
range.)(Do not round intermediate calculations. Omit the "$" sign in your response.)

Maintenance cost in June 97,700

$

2. Using the high-low method, estimate a cost formula for maintenance. (Round the "Variable cost per
unit" to 2 decimal places and "Fixed cost" to the nearest dollar amount. Omit the "$" sign in
your response.)

Y = 14,900 + 1.15 X
$ $

3. Express the company’s total overhead cost in the form Y = a + bX. (Round the "Variable cost per
unit" to 2 decimal places and "Fixed cost" to the nearest dollar amount. Omit the "$" sign in
your response.)

Y = 74,900 + 2.55 X
$ $

4. What total overhead cost would you expect to be incurred at an activity level of 47,000 machine-
hours? (Do not round intermediate calculations. Omit the "$" sign in your response.)

Total overhead cost 194,750

$
Explanation:
1.
Maintenance cost at the 72,000 machine-hour level of activity can be isolated as follows:

Level of Activity
42,000 MH 72,000 MH
Total factory
$ 182,000 $ 258,500
overhead cost
Deduct:
Utilities
cost @ $1.40 58,800 100,800
per MH*
Supervisory
60,000 60,000
salaries

Maintenance
$ 63,200 $ 97,700
cost

*$58,800 ÷ 42,000 MHs = $1.40 per MH

2.
High-low analysis of maintenance cost:

Machine Maintenance
Hours Cost
High activity level 72,000 $ 97,700
Low activity level 42,000 63,200

Change 30,000 $ 34,500

Variable cost per unit of activity:

Change in cost $34,500

= = $1.15 per MH
Change in activity 30,000 MHs

Total fixed cost:

Total maintenance cost at the low

$ 63,200
activity level
Less the variable cost element
(42,000 MHs × $1.15 per MH) 48,300

Fixed cost element $ 14,900

Therefore, the cost formula is $14,900 per month plus $1.15 per machine-hour or
Y = $14,900 + $1.15X

3.
Variable Rate per
Machine-Hour Fixed Cost
Maintenance cost $ 1.15 $ 14,900
 Utilities cost 1.40
Supervisory salaries cost 60,000

Totals $ 2.55 $ 74,900

Thus, the cost formula is: Y = $74,900 + $2.55X.

4.
Total overhead cost at an activity level of 47,000 machine-hours:

Fixed cost $ 74,900

Variable costs: $2.55 per MH ×
119,850
47,000 MHs

Total overhead costs $ 194,750

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