PROBLEM 2–21 High-Low Method; Predicting Cost [LO3, LO4] Golden Company’s total overhead cost at… 1 answer below »
PROBLEM 2–21 High-Low Method; Predicting Cost [LO3, LO4]
Golden Company’s total overhead cost at various levels of activity are presented below:
Month
Machine-Hours
Total Overhead Cost
March . . . . . . . . . . . . . . . . . . . . .
50,000
$194,000
April . . . . . . . . . . . . . . . . . . . .
40,000
$170,200
May . . . . . . . . . . . . . . . . . . . . .
60,000
$217,800
June . . . . . . . . . . . . . . . . . . . . . . . . .
70,000
$241,600
Assume that the overhead cost above consists of utilities, supervisory salaries, and maintenance. The breakdown of these costs at the 40,000 machine-hour level of activity is as follows:
The company wants to break down the maintenance cost into its variable and fixed cost elements.
Required:
1. Estimate how much of the $241,600 of overhead cost in June was maintenance cost. (Hint: To do this, it may be helpful to first determine how much of the $241,600 consisted of utili- ties and supervisory salaries. Think about the behavior of variable and fixed costs within the relevant range.)
2. Using the high-low method, estimate a cost formula for maintenance.
3. Express the company’s total overhead cost in the form Y = a + bX.
4. What total overhead cost would you expect to be incurred at an activity level of 45,000 machine-hours?
