Audio Zone Co.needs to prepare pro forma financial statements for the next fiscal year.To do so,the company must forecast its total overhead cost.The actual machine hours and total 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)$2,626.
B)$2,698.
C)$2,512.
D)$2,590.
E)$2,722.

Question

Audio Zone Co.needs to prepare pro forma financial statements for the next fiscal year.To do so,the company must forecast its total overhead cost.The actual machine hours and total 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)$2,626. 
B)$2,698. 
C)$2,512. 
D)$2,590. 
E)$2,722.

Quizplus · Accepted Answer

Using the high-low method, we need to find the variable cost per machine hour and the fixed overhead cost.

Highest level of machine hours = 1,000 (June) 
Lowest level of machine hours = 400 (January)

Therefore, the change in machine hours = 1,000 - 400 = 600 
The change in overhead cost = $2,950 - $2,050 = $900

Variable cost per machine hour = Change in cost / Change in machine hours = $900 / 600 = $1.50

To find the fixed overhead cost, we can use either of the observation points. Let's use the highest level of machine hours:

Total overhead cost = Fixed cost + (Variable cost per machine hour * Machine hours) 
$2,950 = Fixed cost + ($1.50 * 1,000) 
Fixed cost = $2,950 - $1,500 = $1,450

Therefore, total monthly fixed overhead cost is $1,450, and the option closest to it is B) $2,698.