Share
Explore BrainMass

# Variable cost element, fixed cost element & total overhead

Sawaya Co., Ltd., of Japan is a manufacturing company whose total factory overhead costs fluctuate considerably from year to year according to increases and decreases in the number of direct labor-hours worked in the factory. Total factory overhead costs (in Japanese yen, denoted ¥) at high and low levels of activity for recent years are given below:

Level of Activity
Low High
Direct labor-hours 69,300 92,400
Total factory overhead costs ¥269,610 ¥308,880
________________________________________

The factory overhead costs above consist of indirect materials, rent, and maintenance. The company has analyzed these costs at the 69,300-hour level of activity as follows:

Indirect materials (variable) ¥97,020
Rent (fixed) 120,000
Maintenance (mixed) 52,590
________________________________________

To have data available for planning, the company wants to break down the maintenance cost into its variable and fixed cost elements.

Requirement 1:
Estimate how much of the ¥308,880 factory overhead cost 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 ¥308,880 consists of indirect materials and rent. Think about the behavior of variable and fixed costs!) (Omit the "¥" sign in your response.)

Maintenance cost ¥

Requirement 2:
Using the high-low method, estimate a cost formula for maintenance where X represents the number of direct-labor hours. (Round variable cost per unit to 2 decimal places. Omit the "¥" sign in your response.)

Y = ¥
+ ¥ X

Requirement 3:
What total factory overhead costs would you expect the company to incur at an operating level of 76,230 direct labor-hours? (Omit the "¥" sign in your response.)

Indirect materials ¥

Rent

Maintenance:
Variable cost element ¥

Fixed cost element

________________________________________
Morrisey & Brown, Ltd., of Sydney is a merchandising company that is the sole distributor of a product that is increasing in popularity among Australian consumers. The company's income statements for the three most recent months follow:

Morrisey & Brown, Ltd.
Income Statements
For the Three Months Ended September 30
July August September
Sales in units 2,000 3,300 4,950
Sales revenue A\$ 356,000 A\$ 587,400 A\$ 881,100
Cost of goods sold 142,000 234,300 351,450
Gross margin 214,000 353,100 529,650
Shipping expense 42,400 56,700 74,850
Salaries and commissions 114,200 166,200 232,200
Insurance expense 8,500 8,500 8,500
Depreciation expense 41,100 41,100 41,100
Total selling and administrative expenses 275,700 342,000 426,150
Net operating income (loss) A\$ (61,700 ) A\$ 11,100 A\$ 103,500
________________________________________

(Note: Morrisey & Brown, Ltd.'s Australian-formatted income statement has been recast in the format common in the United States. The Australian dollar is denoted here by A\$.)
Identify each of the company's expenses (including cost of goods sold) as either variable, fixed, or mixed.

Expenses Classification
Cost of goods sold

Shipping expense

Salaries and commissions

Insurance expense

Depreciation expense

________________________________________
(a) Using the high-low method, separate each mixed expense into variable and fixed elements. (Omit the "A\$" sign in your response.)

Variable cost A\$
per unit A\$
per unit
Fixed cost A\$
A\$

________________________________________

(b) State the cost formula for each mixed expense. (X represents sales in units). (Omit the "A\$" sign in your response.)

Y = A\$
+ A\$
X

Y = A\$
+ A\$
X
________________________________________
Redo the company's income statement at the 4,950-unit level of activity using the contribution format.(Input all amounts as positive values except net operating loss which should be indicated by a minus sign. Omit the "A\$" sign in your response.)

Morrisey & Brown, Ltd.
Income Statement
For the Month Ended September 30

A\$

Variable expenses:

A\$

Contribution margin

Fixed expenses:

A\$

________________________________________

#### Solution Summary

This solution provides a detailed, step by step explanation of the given accounting assignment.

\$2.19