University:
Eastern Kentucky University
Course:
ACC 202 | Introduction to Managerial Accounting
Academic year:

2020
Views:

469

Pages:

2
Author:

Dominick Dickson

Tutorial Class Chapter 10 Exercise (Question) 2020 – 2021 Semester 2 Chapter 10 Question Nova Company’s total overhead costs at various levels of activity are presented below: Month Machine-hours 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 costs above consist of utilities, supervisory salaries, and maintenance, the breakdown of these costs at the 60,000 machine-hour level of activity is: Utilities (variable) Supervisory salaries (fixed) Maintenance (mixed) Total overhead cost $ 48,000 21,000 105,000 $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 maybe helpful to first determine how much of the $246,000 consisted of utilities and supervisory salaries. Think about the behavior of variable and fixed cost!) 2. Using the high-low method, estimate a cost formula for maintenance. 3. Express the company’s total overhead costs in the linear equation form Y = a + bX. 4. What total overhead costs would you expect to be incurred at an operating activity level of 75,000 machinehours? 1 Tutorial Class Chapter 10 Exercise (Answer) 2020 – 2021 Semester 2 Chapter 10 Suggested Solution 1. Calculate the utilities cost per machine hour $48,000 ÷ 60,000 MH = $0.8 per MH Hence, the Maintenance cost = Total overhead cost – Utilities cost @ activity level - Supervisory Cost = $246,000 – 90,000 x $0.8 - $21,000 =$153,000 2. The high activity level is 90,000 in July and Low activity level is 60,000 in May, hence High Activity Level Low Activity Level Change Machine-Hour 90,000 60,000 30,000 The variable Rate = $48,000 ÷ 30,000 machine-hour = $1.6 per MH Take the data in July (High activity level), the fixed cost element =$153,000 – 90,000 x $1.6 = $9,000 i.e. the cost formula is Y = $9,000 + $1.6X 3. The total variable rate = $1.6 + $0.8 = $2.4 per MH The total fixed cost element = $90,000 + $21,000 = $30,000 i.e. the overall cost formula is Y = $30,000 + $2.4X 4. The total overhead cost at an activity level of 75,000 MH will be $30,000 + 75,000 x $2.4 = $210,000 1 Maintenance Cost $153,000 $105,000 $48,000