A. This is the total factory overhead allocated in the middle month, February, divided by the number of direct labor hours used during February, and multiplied by the number of direct labor hours used in January. This is not the correct way to estimate fixed cost.
B. $30,000 is the total variable overhead at the level of 1,000 direct labor hours.
C. The best method to use to separate variable and fixed factory overhead costs is the High-Low Points method. First, calculate the variable portion of the cost. This is done by dividing the difference between the highest and the lowest total factory overhead costs by the difference between the number of units of the associated direct labor hours. The result is the variable cost per unit:($200,000 - $80,000) / (5,000 - 1,000) = $30 variable cost per direct labor hourThe next step is to find the fixed cost using the following equation:
FC = Total Cost - Variable Cost
We solve the above equation using the data from either the highest or the lowest observation. Using the highest observation, this will be:
FC = $200,000 - ($30 × 5,000)
FC = $50,000
The result will be the same if data from the lowest observation is used:
FC = $80,000 - ($30 × 1,000)
FC = $50,000
D. This answer is incorrect. Please see correct answer for an explanation.
