The Ramon Company is a manufacturer that is interested in developing a cost form

Question

The Ramon Company is a manufacturer that is interested in developing a cost formula to estimate the fixed and variable components of its monthly manufacturing overhead costs. The company wishes to use machine-hours as its measure of activity and has gathered the data below for this year and last year: Last Year This Year Machine- Overhead Machine- Overhead Month January February March April May June July August September October November December Hours Costs Hours Costs 22,600 $ 86,000 22,600 $ 88,000 31,750 $115,000 30,750 $109,000 28,750 $ 91,100 29,750 $ 94,600 29,750 $ 91,600 28,750 $ 88,600 27,250 $ 83,100 21,750 $ 81,600 18,500 $ 83,500 17,500 $84,500 15,600 $ 78,500 13,600 $ 75,500 10,500 $ 72,500 4,600 $76,000 17,500 $ 77,000 16,600 $ 81,500 18,600 $ 83,000 18,600 $ 80,500 17,600 $ 79,500 16,600 $ 79,000 18,000 $ 86,000 17,500 $ 83,000 The company leases all of its manufacturing equipment. The lease arrangement calls for a flat monthly fee up to 19,500 machine-hours. If the machine-hours used exceeds 19,500, then the fee becomes strictly variable with respect to the total number of machine-hours consumed during the month. Lease expense is a major element of overhead cost.

Explanation / Answer

Statement showing computations Particulars Machine Hours Overhead costs High Level of activity                31,750.00           115,000.00 Low Level of activity                10,500.00             72,500.00 Change                21,250.00             42,500.00 Variable Cost element = 42,500/21,250                          2.00 Fixed Cost element = 72,500 - 10,500*2                51,500.00 4) Overhead costs = 24,100*2 + 51,500                99,700.00

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