Reference: 06-04
In the O'Donnell Manufacturing Company, at an activity level of 80,000 machine hours, total overhead costs were
$223,000. Of this amount, utilities were $48,000 (all variable) and depreciation was $60,000 (all fixed). The balance of the overhead cost consisted of maintenance cost (mixed). At 100,000 machine hours, maintenance costs were $130,000.
Assume that all of the activity levels mentioned in this problem are within the relevant range.
-If 110,000 machine hours of activity are projected for next period, total expected overhead cost would be?
A)$256,000.
B)$306,625.
C)$242,500.
D)$263,500.

Question

Quizplus · Accepted Answer

To calculate total expected overhead costs, we need to separate out the fixed and variable components of the maintenance costs.

Step 1: Calculate the variable portion of overhead costs per machine hour:

Variable overhead costs = utilities

Variable overhead costs per machine hour = $48,000 / 80,000 machine hours = $0.60 per machine hour

Step 2: Calculate the fixed portion of overhead costs:

Fixed overhead costs = depreciation

Step 3: Calculate the mixed portion of overhead costs:

Total overhead costs at 100,000 machine hours = utilities + depreciation + maintenance costs = $48,000 + $60,000 + $130,000 = $238,000

Total mixed costs = Total overhead costs - fixed costs - variable costs = $238,000 - $60,000 - ($0.60 x 100,000 machine hours) = $178,000

Step 4: Use the high-low method to estimate how much of the mixed costs are variable:

Variable maintenance costs per machine hour = [(Total overhead costs at 100,000 machine hours - Total overhead costs at 80,000 machine hours) / (100,000 machine hours - 80,000 machine hours)]

= ($130,000 - $178,000) / (100,000 machine hours - 80,000 machine hours)

= -$4.80 per machine hour

Note that we get a negative number here because the change in overhead costs is negative (as activity level increases, overhead costs decrease). This means that maintenance costs are actually decreasing as machine hours increase (i.e. they are actually fixed costs for this range of activity).

Step 5: Calculate total expected overhead costs at 110,000 machine hours:

Variable overhead costs = (110,000 machine hours) x ($0.60 per machine hour) = $66,000

Fixed overhead costs = $60,000

Mixed overhead costs = $178,000

Total expected overhead costs = Variable overhead costs + Fixed overhead costs + Mixed overhead costs

= $66,000 + $60,000 + $178,000

= $304,000

Therefore, the best choice is D) $263,500.

Reference: 06-04 in the O'Donnell Manufacturing Company, at an Activity Level of Level