PROBLEM 3–16 High–Low Method; Cost of Goods Manufactured [LO1, LO2]

Nurally Inc. manufactures a single product. Selected data from the company’s cost records for two recent months are given below:

 

 

 

 

Number of units produced . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	9,000	12,000
Cost of goods manufactured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$285,000	$390,000
Work in process inventory, beginning . . . . . . . . . . . . . . . . . . . . . .	14,000	22,000
Work in process inventory, ending . . . . . . . . . . . . . . . . . . . . . . . .   .	25,000	15,000
Direct materials cost per unit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	15	15
Direct labour cost per unit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6	6
Manufacturing overhead cost, total . . . . . . . . . . . . . . . . . . . . . . . .	?	?

 

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 over- head cost is variable with units produced and how much of it is fixed per year.

Required:

1.              For both July and October, estimate the amount of manufacturing overhead cost added to production. The company had no underapplied or overapplied overhead in either month. (Hint: Construct a schedule of cost of goods manufactured.)

2.              Using the high–low method, estimate a cost formula for manufacturing overhead. Express the variable portion of the formula in terms of a variable rate per unit of product.

3.              If 9,500 units are produced during a month, what will the cost of goods manufactured be? (Assume that the company’s beginning work in process inventory for the month is $16,000 and that its ending work in process inventory is $19,000. Also assume that there is no underapplied or overapplied overhead cost for the month.)