Nova Company’s total overhead cost at various levels of activity are presented below: Month Machine- Hours Total Overhead Cost April 52,000 $ 202,860 May 42,000 $ 179,060 June 62,000 $ 226,660 July 72,000 $ 250,460 Assume that the total 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: Utilities (variable) $ 50,400 Supervisory salaries (fixed) 66,000 Maintenance (mixed) 62,660 Total overhead cost $ 179,060 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 $250,460 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $250,460 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 47,000 machine-hours?
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Nova Company’s total
| Month | Machine- Hours |
Total Overhead Cost |
|||
| April | 52,000 | $ | 202,860 | ||
| May | 42,000 | $ | 179,060 | ||
| June | 62,000 | $ | 226,660 | ||
| July | 72,000 | $ | 250,460 | ||
Assume that the total 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:
| Utilities (variable) | $ | 50,400 |
| Supervisory salaries (fixed) | 66,000 | |
| Maintenance (mixed) | 62,660 | |
| Total overhead cost | $ | 179,060 |
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 $250,460 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $250,460 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 47,000 machine-hours?
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