Echeverria SA is an Argentinian manufacturing company whose total factory overhead costs fluctuate somewhat from year to year according to the number of machine-hours worked in its production facility. These costs (in Argentinian pesos) at high and low levels of activity over recent years are given below:
Level of Activity Total factory overhead costs
Low (machine hours) 63,000 269,300 pesos
High (machine hours) 84,000 309,200 pesos
The factory overhead costs above consist of indirect materials, rent, and maintenance. The company has analyzed these costs at the 63,000 machine-hours level of activity as follows:
Indirect materials (variable) 88,200 pesos
Rent (fixed) 120,000
Maintenance (mixed) 61,100
Total factory overhead costs 269,300 pesos
For planning purposes, the company wants to break down the maintenance cost into its variable and fixed cost elements.
1. Estimate how much of the factory overhead cost of 309,200 pesos at the high level of activity consists of maintenance cost. (Hint: To do this, it may be helpful to first determine how much of the 309,200 pesos cost consists of indirect materials and rent. Think about the behavior of variable and fixed costs.)
2. Using the high-low method, estimate a cost formula for maintenance. (X represent per machine-hour.) (Round the "Variable cost per machine-hour" to 2 decimal places and "Fixed cost" to the nearest whole number.
3. What total overhead costs would you expect the company to incur at an operating level of 69,300 machine-hours? (Do not round intermediate calculations).
Please see the attached Excel spreadsheet for full solutions.
1a. Find the cost per machine hour of indirect materials
Total indirect materials 88,200 pesos
Total machine hours 63,000
Indirect materials per machine hour 1.40 pesos
1b. Using deduction, find the maintenance cost at 84,000 machine hours
Total costs at 84,000 machine hours 309,200 pesos
Indirect materials ...
This solution illustrates how to determine the fixed and variable components of factory overhead costs using the high-low method and how to apply that information to predict the factory overhead at a given activity level.