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MBA iQ Lesson

Use the following information to answer the following two questions:

XYR Company derived the following cost relationship from a regression analysis of its monthly manufacturing overhead cost.

C = $80,000 + $12 M

where C is monthly manufacturing overhead cost and M is machine hours. The standard error of estimate of the regression is $6,000. The standard time required to manufacture a case of the company’s single product is four machine hours. XYR applies manufacturing overhead to pro­duction on the basis of machine hours, and its normal annual production is 50,000 cases.

What is the estimated variable manufacturing overhead cost for the XYR Company for a month in which scheduled production is 5,000 cases?

a. $200,000

b. $210,000

c. $220,000

d. $240,000

Choice (d) is the correct answer. In the cost equation C = $80,000 + $12 M, where $80,000 is the fixed cost component and $12M is the variable cost component. That is, $12 x 5,000 cases x 4 machine hours per case = $240,000. Choice (a) is incorrect because it multiplies 50,000 with 4, resulting in $200,000. The numbers in the other choices are based on averages.

What is the predetermined fixed manufacturing overhead rate for the XYR Company?

a. $1.60

b. $1.72

c. $4.80

d. $6.40

Choice (c) is the correct answer. Since $80,000 is the fixed component per month, we need to multiply this by 12 to obtain annual fixed cost. The predetermined overhead rate per machine hour is ($80,000 x 12)/(50,000 x 4) = $960,000/200,000 = $4.80. Choice (a) is incorrect because it divides the $80,000 by 50,000 cases, giving $1.60. Choice (b) is incorrect because it divides the ($80,000 +6,000) by 50,000 cases, giving $1.72. Choice (d) is incorrect because it divides the ($80,000 x 4) by 50,000 cases, giving $6.40.