PROBLEM 3-16 High-Low Method; Cost of Goods Manufactured [LO1, LO3] Amfac Compan

Question

PROBLEM 3-16 High-Low Method; Cost of Goods Manufactured [LO1, LO3] Amfac 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-Higlh Number of units produced Cost of goods manufactured Work in process inventory, beginning Work in process inventory, ending Direct materials cost per unit Direct labor cost per unit Manufacturing overhead cost, total 6,000 $168,000 $9,000 $15,000 $6 $10 9,000 $257,000 $32,000 $21,000 S6 $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 vari- able with units produced and how much of it is fixed per month Required: I. For both March and June, estimate the amount of manufacturing overhead cost added to production. The company had no underapplied or overapplied overhead in either month. Hint: A useful way to proceed might be to construct a schedule of cost of goods manufactured.) 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. 2. 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 underapplied or overapplied over- head cost for the month.)

Explanation / Answer

Requirement 1 Amfac Company Schedule of cost of goods Manufactured For March For June Number of Units Produced 6000 Units 9000 Units Cost of Goods manufactured    168,000    257,000 Less.Beginning work in progress inventory      (9,000)    (32,000) Add: Ending work in progress inventory      15,000      21,000 Manufacturing cost    174,000    246,000 Less: Direct Material ($6 X Number of units)        36,000    54,000 Direct Labour ($10 X Number of units)        60,000      96,000    90,000    144,000 Manufacuturing overhead cost      78,000    102,000 Requirement 2 Overhead cost Units High activity level      102,000        9,000 Low activity level      (78,000)      (6,000) Change        24,000        3,000 Unit variable cost = 24000/3000 = $ 8 per unit Fixed cost = Total cost - Variable cost                       =78000 -(6,000X8)                       =$ 30,000 Cost formula for manufacturing overhead = $30,000 + $8 x X X = Number of units Produced Requirement 3 Schedule of cost of Goods Manufactured Number of Units Produced 7000 Units Direct Material ($6 X Number of units)        42,000 Direct Labour ($10 X Number of units)        70,000 Manufacuturing overhead (30000+ 8X7000)        86,000 Cost of goods manufactured      198,000

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