University of Toronto



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:

| |Level of activity | |

| |March – Low |June – High |

|Number of units produced |6,000 |9,000 |

|Cost of goods manufactured |$168,000 |$257,000 |

|Work in process inventory, beginning |9,000 |32,000 |

|Work in process inventory, ending |15,000 |21,000 |

|Direct materials cost per unit |6 |6 |

|Direct labour cost per unit |10 |10 |

|Manufacturing overhead costs, 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 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.

Chapter 2

Solution 2-7

1.

| |March – Low |June – High |

| |6,000 units |9,000 units |

|Direct materials cost @ $6 per unit |$36,000 |$54,000 |

|Direct labour cost @ $10 per unit |60,000 |90,000 |

|Manufacturing overhead cost* |$78,000 |102,000 |

|Total manufacturing costs |174,000 |246,000 |

|Add: Working in process, beginning |9,000 |32,000 |

| |183,000 |278,000 |

|Deduct: Working in process, ending |15,000 |21,000 |

|Cost of goods manufactured |$168,000 |$257,000 |

*Computed by working upwards through the statements

2.

| |Unites produced |Cost observed |

|June – High level of activity |9,000 |$102,000 |

|March – Low level of activity |6,000 |78,000 |

|Change |3,000 |$24,000 |

Change in cost/change in activity = $24,000/3,000 units = $8 per unit

|Total cost at the high level of activity |$102,000 |

|Less variable cost element |72,000 |

|($8.00 per unit x 9000 units) | |

|Fixed cost element |$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 (7,000 units x $6 per | |$42,000 |

|unit) | | |

|Direct labour cost (7,000 units x $10 per | |70,000 |

|unit) | | |

|Manufacturing overhead cost: | | |

|Fixed portion |$30,000 | |

|Variable portion (7000 units x $8.00 per |56,000 |86,000 |

|unit) | | |

|Total manufacturing costs | |198,000 |

|Add: Work in process, beginning | |0 |

| | |198,000 |

|Deduct: Work in process, ending | |0 |

|Cost of goods manufactured | |$198,000 |

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