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Question: recently ryan smith the plant manager of the manufacturing division...

Question details

Recently Ryan Smith, the plant manager of the manufacturing division of Waterways Corporation, has been focusing on changes to overhead costs. He realizes that Ben Clark's new designs call for more automation in the plant, but he is also investigating if there are any opportunities for cost savings.

Ryan thought it might be helpful to his cost-cutting measures if he could predict what manufacturing overhead would be in the following months. But first he needed to determine the appropriate activity base. He thought there could be two possibilities: direct labour or the number of hours of operation.

From historical data, he retrieved the following information:

Direct Labour

Hours of Operation

Manufacturing Overhead

January

$25,000

500

$145,000

February

  24,000

520

  148,000

March

  30,000

700

  170,000

April

  32,000

690

  176,000

May

  27,000

575

  150,000

June

  25,000

550

  140,000

Ryan then asked CFO Jordan Leigh for information available to determine the cost of goods manufactured. Ryan was provided with the following information.

  • 1.The balances in the applicable inventory accounts at the beginning of the month were: Raw materials inventory $35,000; Work in process inventory $52,000.
  • 2.Raw material purchases for the month were $191,000.
  • 3.Of the raw materials used in production, 75% could be traced to the actual production, and the rest was indirect materials.
  • 4.Ending raw materials inventory was $50,000.
  • 5.Actual costs for wages and salaries were $70,000, of which 60% was considered overhead; the balance was direct labour.
  • 6.Hours of operation for the month were 600.
  • 7.Total manufacturing costs for the month were $315,000.
  • 8.Costs transferred into finished goods inventory for the month were $325,000.

Questions:

1. ). a.  

Using the high-low method, and based on the historical data provided, determine two possible cost formulas for manufacturing overhead.

b.  

Using the cost formulas developed in part (a), determine which activity base would be better for predicting manufacturing overhead.

2.)

Prepare a condensed cost of goods manufactured schedule.

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