Minnie Luo - luo.minnie@hotmail.com
Henry Ng
Chapter 2
Question 2-7
ABC Company manufactures a single product. The company keeps careful records of
manufacturing activities from which the following information has been extracted:
Number of units produced
Cost of goods
manufactured
Work in process
inventory, beginning
Work in process
inventory, ending
Direct materials cost per
unit
Direct labour cost per unit
Manufacturing overhead
costs, total
Level of activity
March – Low
6,000
$168,000
June – High
9,000
$257,000
9,000
32,000
15,000
21,000
6
6
10
?
10
?
The company’s manufacturing overhead cost consists of both variable and fixed cost
elements. To have data available for planning, management wants to determine how
much of the overhead cost is variable with units produced and how much of it is
fixed per month.
Required:
1. For both March and June, estimate the amount of manufacturing overhead cost
added to production. The company had no under- or overapplied in either
month.
2. Using the high-low method, estimate a cost formula for manufacturing overhead.
Express the variable portion of the formula in terms of variable rate per unit
product.
3. If 7,000 units are produced during a month, what would be the cost of goods
manufactured? Assume that work in process inventories do not change and that
there is no under- or overapplied overhead cost for the month.
Minnie Luo - luo.minnie@hotmail.com
Henry Ng
Chapter 2
Solution 2-7
1.
Direct materials cost @ $6
per unit
Direct labour cost @ $10
per unit
Manufacturing overhead
cost*
Total manufacturing costs
Add: Working in process,
beginning
March – Low
6,000 units
$36,000
June – High
9,000 units
$54,000
60,000
90,000
$78,000
102,000
174,000
9,000
246,000
32,000
183,000
15,000
278,000
21,000
Unites produced
9,000
Cost observed
$102,000
6,000
78,000
3,000
$24,000
Deduct: Working in
process, ending
Cost of goods
$168,000
$257,000
manufactured
*Computed by working upwards through the statements
2.
June – High level of
activity
March – Low level of
activity
Change
Change in cost/change in activity = $24,000/3,000 units = $8 per unit
Total cost at the high level of activity
Less variable cost element
($8.00 per unit x 9000 units)
Fixed cost element
$102,000
72,000
$30,000
Therefore, the cost formula is : $30,000 per month plus $8.00 per unit produced:
Y= $30,000 + $8X
3.
The cost of goods manufactured if 7,000 units are produced:
Direct material cost
$42,000
(7,000 units x $6 per unit)
Direct labour cost (7,000
70,000
units x $10 per unit)
Minnie Luo - luo.minnie@hotmail.com
Henry Ng
Manufacturing overhead
cost:
Fixed portion
Variable portion (7000
units x $8.00 per unit)
Total manufacturing costs
Add: Work in process,
beginning
Deduct: Work in process,
ending
Cost of goods
manufactured
$30,000
56,000
86,000
198,000
0
198,000
0
$198,000