Home Remodeling Inc. recently obtained a short-term bank loan from City National Bank. The bank required that certain credit information and pro forma financial statements be maintained through the life of the loan. In order to prepare the pro forma statements, Home Remodeling must forecast total overhead cost. The actual machine hours and overhead cost are presented below for the past six months.Using the high-low method, total monthly fixed overhead cost is calculated to be:
A) $626.
B) $696.
C) $612.
D) $690.
E) $722.

Question

Home Remodeling Inc. recently obtained a short-term bank loan from City National Bank. The bank required that certain credit information and pro forma financial statements be maintained through the life of the loan. In order to prepare the pro forma statements, Home Remodeling must forecast total overhead cost. The actual machine hours and overhead cost are presented below for the past six months.Using the high-low method, total monthly fixed overhead cost is calculated to be:
A) $626. 
B) $696. 
C) $612. 
D) $690. 
E) $722.

Quizplus · Accepted Answer

Using the high-low method, we first need to calculate the variable cost per machine hour:

Variable cost per machine hour = (Total overhead cost at high activity level - Total overhead cost at low activity level) / (High activity level - Low activity level)
= ($3,200 - $2,400) / (800 - 400)
= $0.80 per machine hour

Next, we can calculate the fixed cost component:

Total monthly overhead cost = Fixed overhead cost + (Variable overhead cost per machine hour x Machine hours)
$3,200 (using the high activity level data) = Fixed overhead cost + ($0.80 x 800 machine hours)
Fixed overhead cost = $3,200 - $640
Fixed overhead cost = $2,560

Therefore, the total monthly fixed overhead cost using the high-low method is $2,560, which corresponds to answer choice B.