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 / 725 / 1,349 / 102,672

2 / 715 / 1,413 / 103,708

3 / 685 / 1,518 / 109,874

4 / 745 / 1,447 / 108,266

5 / 785 / 1,583 / 116,166

6 / 750 / 1,587 / 114,506

7 / 735 / 1,395 / 107,099

8 / 735 / 1,317 / 102,021

9 / 705 / 1,459 / 106,496

10 / 795 / 1,544 / 113,002

11 / 680 / 1,284 / 100,715

12 / 705 / 1,608 / 113,675

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 1,600 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) Variable cost per machine hour = (113675-100715)/(1608-1284) = $40 per machine hour

Fixed cost = 113675-(1608*40) = $49355

b) Estimated monthly overhead cost = (1600*40)+49355 = $113355

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