| Sawaya Co., Ltd., of Japan is a manufacturing company whose total factory overhead costs 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 given below: |
| Level of Activity | |||||
| Low | High | ||||
| Direct labor-hours | 53,100 | 70,800 | |||
| Total factory overhead costs | $ | 270,410 | $ | 307,580 | |
| The factory overhead costs above consist of indirect materials, rent, and maintenance. The company has analyzed these costs at the 53,100-hour level of activity as follows: |
| Indirect materials (variable) | $ | 100,890 |
| Rent (fixed) | 131,000 | |
| Maintenance (mixed) | 38,520 | |
| Total factory overhead costs | $ | 270,410 |
| To have data available for planning, the company wants to break down the maintenance cost into its variable and fixed cost elements. |
| Required: |
| 1. | Estimate how much of the $307,580 factory overhead cost at the high level of activity consists of maintenance cost. (Hint: To do this, it may be helpful to first determine how much of the $307,580 consists of indirect materials and rent. Think about the behavior of variable and fixed costs!) (Do not round intermediate calculations.)
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| 2. | Using the high-low method, estimate a cost formula for maintenance. (Do not round intermediate calculations.) |
| 3. | What total factory overhead costs would you expect the company to incur at an operating level of 58,410 direct labor-hours? (Do not round intermediate calculations.) |
1
Estimate how much of the $307,580 factory overhead cost at the high level of activity consists of maintenance cost.
| Level Of Activity | ||
| Particular | 53100 | 70800 |
| Total Factory OH Cost | 270410 | 307580 |
| Deduct : | ||
| Indirect Material @1.9 per MH | 100890 | 134520 |
| Rent | 131000 | 131000 |
| Maintainance Cost | 38520 | 42060 |
2
Using the high-low method, estimate a cost formula for maintenance
high-low method, analysis of maintenance cost
| Machine | Maintainance cost |
|
| High Level of Activity | 70800 | 42060 |
| Low level of Activity | 53100 | 38520 |
| Change Observed =70800-53100 |
17700 | 3540 |
Varible cost = Change in cost / Change in Activity
=3540/17700
=0.2
Fixed cost element
| Total cost for Low level of Activity | 38520 |
| Less; | |
| Variable cost element =0.2*53100 |
10620 |
| Fixed Cost element | 27900 |
Therefor the cost formulla is 27900 +0.2 per machine hour
y= 27900+0.2 per Machine hour
3
total factory overhead costs would you expect the company to incur at an operating level of 58,410 direct labor-hours
| Particular | 58410 |
| Indirect Material @1.9 per MH | 110979 |
| Rent | 131000 |
| Maintainance Cost | |
| Variable= 0.2*58410 | 11682 |
| Fixed | 27900 |
| Total Factory OH cost | 281561 |
