Answered Essay: High-Low Analysis and Cost Behavior Susumi Corporation of Japan is a manufacturing company whose total factory overhead costs fluctua

Problems 237 PROBLEM 5-16 High-Low Analysis and Cost Behavior (LOI,LO3) Susumi Corporation of Japan is a manufacturing company whose total factory CHECK FIGURE (2) ¥750.000 per year plus overhead costs fluctuate Y375 per DLH worked in the factory. Total factory overhead costs (in Japanese yen, denoted by ¥) at high and low levels of activity for recent years are given below: Level of Activity High Direct labor-hours Total factory overhead costs 4,000 ¥ 15.250.000 . . .. 5,000 I 7.625,000 The factory overhead costs above consist of indirect materials, rent, and maintenance. The company has analyzed these costs at the 4,000-hour level of activity as follows: Indirect materials() Rent (F) Maintenance (M) ¥8,000,000 5.000.000 o15,50, 2,250,000 . Total factory overhead costs.. V variable; F = fixed: M = mixed. To have data available for planning, the company wants to break down the maintenance cost into it able and fixed cost elements. Required I Estimate how much of the ¥17,625,000 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$ 625,000 consists of indirect materials and rent. Think about the behavior of variable and fixed costs!) 2. Using the high-low method of cost analysis, estimate a cost formula for maintenance. 3. What total factory overhead costs would you expect the company to incur at an operating level of 4.800 direct labor-hours? CHECK FIGURE

High-Low Analysis and Cost Behavior Susumi Corporation 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 by yen) at high and low levels of activity for recent years are given below: The factory overhead costs above consist of indirect materials, rent, and maintenance. The company has analyzed these costs at the 4,000-hour level of activity as follows: To have data available for planning, the company wants to break down the maintenance cost into its variable and fixed cost elements. Required: 1. Estimate how much of the yen 17,625,000 factory overhead cost at the high level of activity consists of maintenance cost. 2. Using the high-low method of cost analysis, estimate a cost formula for maintenance. 3. What total factory overhead costs would you expect the company to incur at an operating level of 4,800 direct labor-hours?

Expert Answer

 

1 ) Let us first of all break the total FOH costs into variable and fixed portion.

We will find out the variable portion of the total FOH costs using High low method :-

( 17625000 – 15250000 ) / ( 5000 – 4000 ) = $ 2375 per DLH

Now, in the total variable FOH of $ 2375 per DLH, Indirect material holds ( 8000000 / 4000 ) $ 2000 per DLH, which means the variable portion of maintenance cost is ( 2375 – 2000 ) $ 375 per DLH.

Coming to , fixed portion, the total fixed FOH cost = 17625000 – 5000 * 2375 = $ 5750000

Out of this , rent holds $ 5000000 , which means the fixed portion of maintenance cost is ( 5750000 – 5000000 ) $ 750000.

Required answer :- out of 17625000, maintenance cost consist of 375 * 5000 + 750000 = $ 2625000

2 ) Cost formula for maintenance cost = $ 375 * no. of DLH + 750000

3 ) At an operating level of 4800 DLH , total FOH costs =

Indirect material ( 2000 * 4800 ) 9600000 + Rent 5000000 + maintenance cost ( 375 * 4800 + 750000 ) 2550000 =

$ 17150000

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