Answer:
Activity level (Units) 7,700 8,000 9,000
$ $ $
Direct material 472,010 490,400 551,700
Direct labour 157,850 164,000 184,500
Manufacturing overhead 1,005,700 1,005,700 1,030,530
Total cost 1,635,560 1,660,100 1,766,730
Separation of Manufacturing Overhead Using High and Low Method
Y X
$ Units
High 1,030,530 9,000
Low (1,005,700) (8,000)
24,830 1,000
Variable cost per unit
= Y/X
= $24,830/1,000 units
= $24.83
Y = a + bx
At highest points
$1,030,530 = a + $24.83(9,000)
$1,030,530 = a + $223,470
$1,030,530 - $223,470 = a
a = $807,060
Total manufacturing overhead for 8,000 units
Y = a + bx
Y = $807,060 + $24.83(8,000)
Y = $807,060 + $198,640
Y = $1,005,700
Explanation:
In this case, the direct material cost for 8,000 units of activity level is obtained by dividing $551,700 by 9,000 units multiplied by 8,000 units.
The direct labour cost for 8,000 units of activity level is determined by dividing $184,500 by 9,000 units multiplied by 8,000 units.
Manufacturing overhead is obtained by using high and low method since it is a semi-variable cost. In this case, we will deduct the lower cost from the higher cost. We will also deduct the lower activity from the higher activity. Then, we will divide the difference in cost by the difference in activity level in order to determine the variable cost per unit.
Then, we will apply the linear equation Y = a + bx. We will substitute the higher value of Y, the higher activity level and the variable cost per unit into the linear equation and make a the subject of the formula. a represents the fixed cost.
Finally, we will predict the manufacturing overhead for 8,000 units of activity by applying the linear equation, where Y is the manufacturing overhead, a is the fixed cost, b is the variable cost per unit and x is 8,000 units of activity level.
