Nova Company\'s total overhead cost at various levels of activity are presented

Question

Nova Company's total overhead cost at various levels of activity are presented below: Total Machine-Overhead Month April May une July Hours 55,000 45,000 203,050 65,000 75,000 284,950 Cost 230,350 257,650 Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 45,000 machine-hour level of activity is: Utilities (variable) Supervisory salaries (fixed) Maintenance (mixed) Total overhead cost $67,500 61,000 74,550 $203,050 Nova Company's management wants to break down the maintenance cost into its variable and fixed cost elements

Explanation / Answer

High-low analysis of maintenance cost

Change in cost/ change in activity level= 81900/30000= 2.73 per MHs

Total fixed cost:

Total maintenance cost at low level of activity= 74500

Less: variable cost element (45000*2.73)= 122850

Fixed cost element= -48350

Therefore, the cost formula is -48350 per month plus 2.73 per machine hour

Y = -48350+2.73X

Machine hours maintenance costs High activity level 75000 284950 Low activity level 45000 203050 Change 30000 81900

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