COMM 294 (921) Assignment 4) Cost Behaviour – 25 MARKS The following selected data was provided by the accounting staff of MMC Ltd. for analytical purposes. The company uses direct labour hours as its cost driver for overhead costs. Depreciation is based on plant life (building and machine) and is applied on a straight-line basis each month. Month Direct-Labour Hours Manufacturing Overhead January 26,000 $749,250 February 25,000 720,000 March 28,000 772,500 April 23,000 681,000 May 30,000 775,500 June 34,000 879,000 June’s costs consisted of machine supplies ($153,000), depreciation ($22,500), and plant maintenance ($703,500). These costs exhibit the following behavior: purely variable, purely fixed and mixed, respectively. The manufacturing overhead figures presented in the preceding table do not include supervisory wages which is step fixed in nature. For volume levels of less than 15,000 hours, supervisory wages amounts to $67,500. The cost is $135,000 from 15,000 – 29,999 hours and $202,500 when activity reaches 30,000 hours or more. REQUIRED: 1. Determine the machine supplies cost and depreciation for April. Machine supplies cost: Depreciation: 2. Using the high-low method, analyze MMC Ltd’s plant maintenance cost and calculate the monthly fixed portion and varia ble cost per directlabour hour. Variable cost per direct-labour: Fixed cost: 3. Assume that present cost behaviour patterns continue into the latter half of the year. Estimate the total amount of manufacturing overhead the company can expect in October if 29,500 direct labour-hours are worked. P a g e | 2 4. Briefly explain the difference between a fixed cost and a step-fixed cost. 5. Assume the company has step-fixed costs. Generally speaking, at what volume level on a step should the firm attempt to operate if it desires to achieve a maximum return on its investment (no comp utation needed)?
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