A Manufacturing Company Whose Total Factory Overhead Cost Fluctuate Considerably

Question

A Manufacturing Company Whose Total Factory Overhead Cost Fluctuate Considerably From Year ... Question: A manufacturing company whose total factory overhead cost fluctuate considerably from year to yea... A manufacturing company whose total factory overhead cost fluctuate considerably from year to year according to increases and decreases in the number of direct labor-hours worked in the factory. Total factory overhead costs at high and low levels of activity for recent years are Low: 52800, High: 70,400, Total factory overhead cost $279,380 Low, and $316,340 High. The factory overhead costs above consist of indirect materials, rent, and maintenance. The company has analyzed these costs at the 52,800-hour level of activity as: indirect materials (variable) $89,760, rent (fixed) 138,000, maintenance (mixed) 51,620, total factory overhead cost: $279,380. Estimate how much of the $316,340 factory overhead cost at the high level of activity consist of maintenance cost. First determine how much of $316,340 consist of indirect materials and rent. Maintenance cost at high level of activity is Using the high-low method estimate a cost formula for maintenance (round the variable cost per DLH to 2 decimal places) High level of activity, low level of activity, change, variable cost element fixed cost element Y=------+--------x What total factory overhead cost would you expect the company to incur at an operating level of 58,080 direct labor-hours?

Explanation / Answer

Variable Fixed Mixed Activity level(hour) Factory overhead Indirect Materials Rent Maintenance 52800 $279,380 $89,760 $138,000 $51,620 70400 $316,340 Indirect material at 70400 hours $                  119,680 (89760/52800)*70400) Rent at 70400 hours level $138,000 Maintenance cost at70400 level $58,660 (316340-119680-138000) Total Factory overhead at 70400 $                  316,340 Maintenance cost at high level $58,660 Maintenance cost at low level $51,620 Y=a+bX Y2=High Level Y1=Low level Y2=a+bX2 Y1=a+bX1 (Y2-Y1)=b(X2-X1) b=(Y2-Y1)/(X2-X1) In this case, b=(Y2-Y1)/(X2-X1) b=(58660-51620)/(70400-52800) b= 0.40 Y2=a+bX2 58660=a+0.4*70400 a=58660-(0.4*70400) 30500 The Required Formula for Maintenance cost: Y=30500+0.4X Y=Maintenance cost X=activity level At operating level58080 hours; Maintenance cost=30500+0.4*58080 $                     53,732 Variable indirect material $                     98,736 (89760/52800)*58080 Rent $138,000 Total factory overhead cost $                  290,468

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