PART ONE: THE ISSUE

Ryan Lucier, the plant manager has been focusing on the changes to overhead costs. He realizes that Staceys new designs call for more automation in the plant but is also investigating if there 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.

Historical Data:

Month	Direct Labour	Hours of Operation	Manufacturing O/H
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 costs of goods manufactured, Ryan was provided 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 (WIP) $52,000.
2. Raw material purchases for the month were $191,000
3. Of the raw material used in production, 75% could be traced to the actual production, and the rest was indirect materials.
4. Ending raw material inventory was $50,000.
5. Actual costs for wages and salaries were $70,000. 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.

Required:

1. Using the High Low Method and based on the historical data provided determine two possible cost formulas for manufacturing overhead.
2. Using the cost formulas developed in (a), determine which activity base would be better for predicting manufacturing overhead.
3. Prepare a condensed cost of goods manufactured schedule.