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

Hours of

Manufacturing Overhead

Labour

$30,000

29,000

Operation

January

860

$184,200

February

880

182,000

March

April

35,000

1,060

208,200

37,000

32,000

1,050

214,000

May

935

185,500

June

30,000

910

174,500

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 $36,000; Work in process inventory $54,000.

2. Raw material purchases for the month were $182,000.

3. Of the raw materials used in production, 80% could be traced to the actual production, and the rest was indirect materials.

4. Ending raw materials inventory was $58,000.

5. Actual costs for wages and salaries were $90,000, of which 50% was considered overhead; the balance was direct labour.

6. Hours of operation for the month were 460.

7.

Total manufacturing costs for the month were $300,000.

8. Costs transferred into finished goods inventory for the month were $330,000.

Using the high-low method, and based on the historical data provided, determine two possible cost formulas for manufacturing overhead. (Round answers to 2 decimal places, eg. 2.75 wherever necessary.)

Cost Formula

Based on direct labour

Based on hours of operation

Using the cost formulas developed in the previous part, determine the manufacturing overhead and actual manufacturing overhead for the month.

Manufacturing overhead

Based on direct labour

Based on hours of operation

Actual

Determine which activity hase would be better for predicting manufacturing overhead