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PROBLEM 2-20 High-Low Method; Predicting Cost [L02-4, L02-5]
Nova Company’s total
Month | MachineHours | Total Overhead Cost |
April …. | 70,000 | $198,000 |
May …. | 60,000 | $174,000 |
June …. | 80,000 | $222,000 |
July …. | 90,000 | $246,000 |
Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 60,000 machine-hour level of activity is:
Utilities (variable) …. | $48,000 |
Supervisory salaries (fixed) ... | 21,000 |
Maintenance (mixed) | 105,000 |
Total overhead cost | $174,000 |
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 $246,000 of overhead cost in July was maintenance cost. (Hint: to do this, it may be helpful to first determine how much of the $246,000 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.
3. Express the company’s total overhead cost in the linear equation form Y = a + bX.
4. What total overhead cost would you expect to be incurred at an activity level of 75,000 machine-hours?
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Managerial Accounting
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