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Level of Activity
January-Low April High
Number of units produced \$12,000.00 \$15,000.00
Cost of goods manufactured \$250,000.00 \$300,000.00
Work in process inventory, beginning \$5,000.00 \$16,000.00
Work in process inventory, ending \$6,000.00 \$9,000.00
Direct materials cost per unit \$4.00 \$4.00
Direct labor cost per unit \$8.00 \$8.00
Manufacturing overhead cost, total ? ?

Parker Company manufactures a single product and keeps records of manufacturing activities from which the above information has been extracted.

The company's manufacturing overhead cost of both variable and fixed cost elements. To have data available for planning, management wants to determine how much of the overhead cost if variable with units produced and how much of it is fixed per month.

Required:

1.) For both January and April, estimate the amount of manufacturing overhead cost added to production. The company had no under applied or over applied overhead in either month. (Hint: A useful way to proceed might be to 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 13,500 units are produced during a month, what would the cost of goods manufactured be? (Assume that work in process inventories do not change and that overhead cost is neither under applied nor over applied for the month).

#### Solution Preview

Required:

1.) For both January and April, estimate the amount of manufacturing overhead cost added to production. The company had no under applied or over applied overhead in either month. (Hint: A useful way to proceed might be to construct a schedule of cost of goods manufactured).

Cost of goods manufactured = Opening WIP + Direct material + Direct labor + Applied Overhead - Ending WIP
We use the above equation to calculate the overhead cost
For Jan
Total material cost = ...

#### Solution Summary

The solution explains how to determine the variable and fixed part of manufacturing overhead cost using the high low method

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