Answer:
a. Total overhead = $294,720 + $24 × machine hours
b. Total overhead = $137,040 + $0.05 × Kilowatt-hours
c. The kilowatt-hours was the best predictor for July
Explanation:
High low method is used to separate the variable cost and fixed costs elements in a Semi-Variable Cost item.
machine-hours as cost driver.
<u><em>First find the 2 points : the High and the Low</em></u>
High Point : March
Machine-hours = 4,680
Total Overhead = $ 407,040
Low Point : June
Machine-hours = 3,720
Total Overhead = $ 384,000
<u><em>Next find the Difference in the overhead cost and the cost driver of the 2 points</em></u>
Overheads = $23,040
Machine-hours = 960
<em><u>Find the Variable cost element </u></em>
Variable cost = difference in overhead / difference in cost driver
= $23,040 / 960
= $24
<u><em>Find the Fixed Cost Element.</em></u>
Fixed Cost = Total Overhead - Variable Overhead
selecting the high point, this will be :
= $ 407,040 - (4,680 × $24)
= $294,720
<em><u>Determine the Cost function </u></em>
Total overhead = $294,720 + $24 × machine hours
machine-hours as cost driver.
<u><em>First find the 2 points : the High and the Low</em></u>
High Point : March
Kilowatt-hours = 5,400,000
Total Overhead = $ 407,040
Low Point : June
Kilowatt-hours = 4,944,000
Total Overhead = $ 384,000
<u><em>Next find the Difference in the overhead cost and the cost driver of the 2 points</em></u>
Overheads = $23,040
Kilowatt-hours = 456,000
<em><u>Find the Variable cost element </u></em>
Variable cost = difference in overhead / difference in cost driver
= $23,040 / 456,000
= $0.05
<u><em>Find the Fixed Cost Element.</em></u>
Fixed Cost = Total Overhead - Variable Overhead
selecting the high point, this will be :
= $ 407,040 - (5,400,000 × $0.05)
= $137,040
<em><u>Determine the Cost function </u></em>
Total overhead = $137,040 + $0.05 × Kilowatt-hours
Apply the machine hours for july
Total overhead = $294,720 + $24 × machine hours
= $294,720 + $24 × 4,000
= $390,720
Apply kilowatt-hours for july
Total overhead = $137,040 + $0.05 × Kilowatt-hours
= $137,040 + $0.05 × 4,550,000
= $364,540
Conclusion :
The kilowatt-hours was the best predictor for July
