The answer $33,333 was found by mistakenly adding the high and low numbers together and then dividing them. So, ($200,000 + $80,000) ÷ (5,000 + 1,000) = $46.6667. Multiply $46.6667 × 5,000 direct labor hours = $233,333. Total cost = FC + VC. Therefore, using the equation $200,000 = FC + $233,333 and solving for FC results in FC = $(33,333). This is not the correct way to calculate fixed cost. Furthermore, it results in a negative amount of fixed cost, which is not logical. The high and low numbers for both total cost and total production should be subtracted to find the difference instead of added.
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.
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 hour The 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
$30,000 is the total variable overhead at the level of 1,000 direct labor hours.
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Based upon this information, monthly fixed factory overhead was