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High-Low Method; Predicting Cost
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?
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