Adriana Corporation manufactures football equipment. In planning for next year,

Question

Adriana Corporation manufactures football equipment. In planning for next year, the managers want to understand the relation between activity and overhead costs. Discussions with the plant supervisor suggest that overhead seems to vary with labor-hours, machine-hours, or both. The following data were collected from last year's operations: Month Labor-Hours Machine-Hours Overhead Costs 1 730 1,351 $ 102,786 2 715 1,406 103,858 3 685 1,525 109,986 4 735 1,449 108,336 5 785 1,597 116,173 6 755 1,581 114,518 7 735 1,387 107,065 8 735 1,315 102,126 9 705 1,449 106,345 10 795 1,549 113,033 11 685 1,296 101,022 12 715 1,612 113,504 Required: a. Use the high-low method to estimate the fixed and variable portions of overhead costs based on machine-hours. (Round "Variable cost" answer to 2 decimal places.) b. Managers expect the plant to operate at a monthly average of 1,500 machine-hours next year. What are the estimated monthly overhead costs, assuming no inflation? (Round "Variable cost" answer to 2 decimal places.)

Explanation / Answer

a. Use the high-low method to estimate the fixed and variable portions of overhead costs based on machine-hours. (Round "Variable cost" answer to 2 decimal places.)

Variable cost per machine hour = Change in cost/Change in machine hour

= (113504-101022)/(1612-1296)

Variable cost per machine hour = $39.50 per machine hour

Fixed cost = Total cost-Variable cost

= 113504-(1612*39.5)

Fixed cost = $49830

2) Monthly overhead = 49830+(1500*39.50) = $109080

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