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The following information is available regarding the total manufacturing overhead of Bursa Mfg. Co. for a recent four-month period. Machine- Manufacturing Overhead Hours January 6,000 $320,000 February 3,200 224,000 March 4,900 264,000 April 2,500 a.o180,00O а. Use the high-low method to determine: 1. The variable element of manufacturing overhead costs per machine-hour. 2. The fixed element of monthly overhead cost. Bursa expects machine-hours in May to equal 4,500. Use the cost relationships determined in part a to forecast May's manufacturing overhead costs. Suppose Bursa had used the cost relationships determined in part a to estimate the total manu- facturing overhead expected for the months of February and March. By what amounts would b. с. Bursa have over- or underestimated these costs?

The following information is available regarding the total manufacturing overhead of Bursa Mfg. Co. for a recent four-month period. Machine- Manufacturing Overhead Hours January 6,000 $320,000 February 3,200 224,000 March 4,900 264,000 April 2,500 a.o180,00O а. Use the high-low method to determine: 1. The variable element of manufacturing overhead costs per machine-hour. 2. The fixed element of monthly overhead cost. Bursa expects machine-hours in May to equal 4,500. Use the cost relationships determined in part a to forecast May's manufacturing overhead costs. Suppose Bursa had used the cost relationships determined in part a to estimate the total manu- facturing overhead expected for the months of February and March. By what amounts would b. с. Bursa have over- or underestimated these costs?

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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## Understanding Manufacturing Overhead Using the High-Low Method The following information is available regarding the total manufacturing overhead for Bursa Manufacturing Co. over a recent four-month period: | Month | Machine Hours | Manufacturing Overhead | |----------|---------------|------------------------| | January | 6,000 | $320,000 | | February | 3,200 | $224,000 | | March | 4,900 | $264,000 | | April | 2,500 | $180,000 | ### Objectives 1. **Use the High-Low Method to Determine:** - **a.** The variable element of manufacturing overhead cost. - **b.** The fixed element of monthly overhead cost. - **c.** Forecast May’s manufacturing overhead costs using projected machine-hours. ### Steps **a. Calculate Variable Overhead Cost:** - Use the highest and lowest machine hours with corresponding overhead costs to calculate the variable cost per machine hour. **b. Determine Fixed Overhead Cost:** - Subtract total variable cost from total overhead at either high or low point to find fixed cost. **c. Forecast May’s Overhead Costs:** - Bursa expects machine-hours in May to equal 4,500. Use the relationships determined to estimate total manufacturing overhead. Evaluate if the costs for February and March were over or underestimated. ### Explanation This method helps in breaking down mixed costs into variable and fixed components which is useful for budgeting and forecasting. By examining the highest and lowest levels of activity, we can observe how changes affect the overall cost structure. This knowledge is crucial for making informed business decisions, setting price points, and controlling costs effectively.
Transcribed Image Text:## Understanding Manufacturing Overhead Using the High-Low Method The following information is available regarding the total manufacturing overhead for Bursa Manufacturing Co. over a recent four-month period: | Month | Machine Hours | Manufacturing Overhead | |----------|---------------|------------------------| | January | 6,000 | $320,000 | | February | 3,200 | $224,000 | | March | 4,900 | $264,000 | | April | 2,500 | $180,000 | ### Objectives 1. **Use the High-Low Method to Determine:** - **a.** The variable element of manufacturing overhead cost. - **b.** The fixed element of monthly overhead cost. - **c.** Forecast May’s manufacturing overhead costs using projected machine-hours. ### Steps **a. Calculate Variable Overhead Cost:** - Use the highest and lowest machine hours with corresponding overhead costs to calculate the variable cost per machine hour. **b. Determine Fixed Overhead Cost:** - Subtract total variable cost from total overhead at either high or low point to find fixed cost. **c. Forecast May’s Overhead Costs:** - Bursa expects machine-hours in May to equal 4,500. Use the relationships determined to estimate total manufacturing overhead. Evaluate if the costs for February and March were over or underestimated. ### Explanation This method helps in breaking down mixed costs into variable and fixed components which is useful for budgeting and forecasting. By examining the highest and lowest levels of activity, we can observe how changes affect the overall cost structure. This knowledge is crucial for making informed business decisions, setting price points, and controlling costs effectively.
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