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Solution to the question number E2-25 (a)

Month
Machine Hours
Overhead costs
1
425
$2,525
2
460
$2,961
3
410
$2,484
4
480
$2,649
5
502
$2,705
6
418
$2,496

variable cost component (b) = Change in total cost / Change in activity level

Here, highest activity level is on month 5 = 502 machine hours; lowest level of activity is on month 3 = 410 machine hours b= (2705 – 2484) / (502 – 410) = 2.40

Activity level High
Low
Total Cost
$2,705
$2,484
Less: Variable costs

502 × 2.40
1205

410 × 2.40

984
Total Fixed costs
1500
1500

So, the fixed overhead cost is $1,500 (using the machine hour estimate).

Month
Total Overhead cost
Fixed Cost
Monthly variable cost
1
2525
1500
1025
2
2961
1500
1461
3
2484
1500
984
4
2649
1500
1149
5
2705
1500
1205
6
2496
1500
996

Answer to the question number E2-25 (b)

y= a + bx
Fixed cost (a) = $1,500; Variable component (b) = 2.40 [for machine hours]
Predicted Machine hours (X) = 850
So, total overhead cost = 1500 + (2.40 × 850) = $3,540

Answer to the question number E2-25 (c)

Fixed cost (a) = $1,750; Variable cost component (b) = $0.35; Labour hour (X) = 3150
Total overhead cost using direct labour hour (y)= a + bx = 1750 + (0.35 × 3150) = $2,853
Fixed cost (a) = $1,500; Variable cost component (b) = $2.40; Labour hour (X) = 492
Total overhead cost using direct labour hour (y)= a + bx = 1500 + (2.40 × 492) = $2,681

Answer to the question number E2-25 (d)

If April’s actual fixed overhead cost is $1,525 & actual variable overhead cost is $1,200, then total actual overhead cost for the month is = (1525 + 1200) = $2,725
According to direct labour hour prediction, the fixed overhead cost is = $1,750
According to machine prediction, the fixed overhead cost is = $1,500 the activity base appears best is the machine hour prediction for the XYZ company.