Question

Adriana Corporation manufactures football equipment. In planning for next year, the managers want to understand the relation between activity and overhead costs. Discussions with the plant supervisor suggest that overhead seems to vary with labor-hours, machine-hours, or both. The following data were collected from last year's operations. Month Labor-Hours Machine-Hours Overhead Costs 1 3,625 6,775 $ 513,435 2 3,575 7,035 518,960 3 3,400 7,600 549,575 4 3,700 7,265 541,400 5 3,900 7,955 581,145 6 3,775 7,895 572,320 7 3,700 6,950 535,110 8 3,625 6,530 510,470 9 3,550 7,270 532,195 10 3,975 7,725 565,335 11 3,375 6,490 503,775 12 3,550 8,020 564,210 Required: a. Use the high-low method to estimate the fixed and variable portions of overhead costs based on machine-hours.

Answer 1

Answer:

$50.57 ; $175,573.6

Explanation:

The computation of the fixed and variable portions of overhead costs based on machine-hours using high low method is shown below:

Variable cost per hour = (High Overhead cost - low overhead cost) ÷ (High machine hours - low service hours)

= ($581,145 - $503,775) ÷ (8,020 hours - 6,490 hours)

= $77,370 ÷ 1,530 hours

= $50.57

Now the fixed cost equal to

= High overhead cost - (High machine hours × Variable cost per hour)

= $581,145 - (8,020 hours × $50.57)

= $581,145 - $405,571.4

= $175,573.60