Tanner Inc. has incurred the following overhead costs over a 6 week period: Week

Question

Tanner Inc. has incurred the following overhead costs over a 6 week period: Week Machine Hours Overhead Cost 1 68 1,190 2 62 1,004 3 72 918 4 46 710 5 94 1025 6 48 965 Using the high-low method, calculate the variable cost component of these overhead costs (round to the nearest two decimal places). Calculate the approximate fixed cost component of Tanner's overhead costs using the high-low method If Tanner expects to have 65 hours of machine time in a future week, what overhead costs could they expect to incur?

Explanation / Answer

The high-low method is very simple to use. 1. Subtract the lowest cost driver (Machine Hours) and its corresponding cost from the highest cost driver and its corresponding cost. High: June - 2,974 / MH $26,860 / MC Low: April - 2,887 / MH $26,532 / MC = . . . . . . . . . 87. . . . . . . . 328 2. To calculate the variable cost, divide the cost by the cost driver. 328 / 87 = $3.77 Variable cost per machine hour. 3. To calculate the fixed cost, multiply the variable cost per machine hour by either the high or low number of hours and subtract it from the corresponding high or low cost. You can use either one, they will yield the same answer. 26,860 - (3.77 x 2,974) = 15,648 Fixed Cost 26,532 - (3.77 x 2,887) = 15,648 Fixed Cost B. $3.77 per machine-hour; $15,648 per month

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