Nova Company’s total overhead cost at various levels of activity are presented below:TotalMachine- OverheadMonth Hours CostApril ............................ 70,000 $198,000May ............................ 60,000 $174,000June ........................... 80,000 $222,000July ............................. 90,000 $246,000Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. Thebreakdown of these costs at the 60,000 machine-hour level of activity is:Utilities (variable) ................................... $ 48,000Supervisory salaries (fixed) ................... 21,000Maintenance (mixed) ............................. 105,000Total overhead cost ............................... $174,000Nova Company’s management wants to break down the maintenance cost into its variable and fixedcost elements.Required:1. Estimate how much of the $246,000 of overhead cost in July was maintenance cost. (Hint: to do this,it may be helpful to first determine how much of the $246,000 consisted of utilities and supervisorysalaries. Think about the behavior of variable and fixed costs!)2. Using the high-low method, estimate a cost formula for maintenance.3. Express the company’s total overhead cost in the linear equation form Y a bX.4. What total overhead cost would you expect to be incurred at an operating activity level of 75,000machine-hours?
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Nova Company’s total
Total
Machine- Overhead
Month Hours Cost
April ............................ 70,000 $198,000
May ............................ 60,000 $174,000
June ........................... 80,000 $222,000
July ............................. 90,000 $246,000
Assume that the total overhead cost above consists of utilities, supervisory salaries, and maintenance. The
breakdown of these costs at the 60,000 machine-hour level of activity is:
Utilities (variable) ................................... $ 48,000
Supervisory salaries (fixed) ................... 21,000
Maintenance (mixed) ............................. 105,000
Total overhead cost ............................... $174,000
Nova Company’s management wants to break down the maintenance cost into its variable and fixed
cost elements.
Required:
1. Estimate how much of the $246,000 of overhead cost in July was maintenance cost. (Hint: to do this,
it may be helpful to first determine how much of the $246,000 consisted of utilities and supervisory
salaries. Think about the behavior of variable and fixed costs!)
2. Using the high-low method, estimate a cost formula for maintenance.
3. Express the company’s total overhead cost in the linear equation form Y a bX.
4. What total overhead cost would you expect to be incurred at an operating activity level of 75,000
machine-hours?
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