Question

Q3 Time period used to compute indirect cost rates. Plunge Manufacturing produces outdoor wading and slide pools. The company uses a normal-costing system and allocates manufacturing overhead on the basis of direct manufacturing labor-hours. Most of the company's production and sales occur in the first and second quarters of the year. The company is in danger of losing one of its larger customers, Socha Wholesale, due to large fluctuations in price. The owner of Plunge has requested an analysis of the manufacturing cost per unit in the second and third quarters. You have been provided the following budgeted information for the coming year: Quarter 1 2 3 4 Pools manufactured and sold 565 490 245 100 It takes 1 direct manufacturing labor-hour to make each pool. The actual direct material cost is $14.00 per pool. The actual direct manufacturing labor rate is $20 per hour. The budgeted variable manufacturing overhead rate is $15 per direct manufacturing labor-hour. Budgeted fixed manufacturing overhead costs are $12,250 each quarter. Required: 1. Calculate the total manufacturing cost per unit for the second and third quarter assuming the company allocates manufacturing overhead costs based on the budgeted manufacturing overhead rate determined for each quarter. 2. Calculate the total manufacturing cost per unit for the second and third quarter assuming the company allocates manufacturing overhead costs based on an annual budgeted manufacturing overhead rate. 3. Plunge Manufacturing prices its pools at manufacturing cost plus 30%. Why might Socha Wholesale be seeing large fluctuations in the prices of pools? Which of the methods described in requirements 1 and 2 would you recommend Plunge use? Explain.

Answer 1

1						Q2	Q3
	Pools manufactured and sold				a	490	245
	Direct manufacturing labor hour				b=1*a	490	245
	Budgeted fixed manufacturing overhead				c	12250	12250
	Fixed manufacturing overhead rate				d=c/b	25	50
	Total manufacturing cost per unit:
						Q2	Q3
	Direct materials					14	14
	Direct labor				(1*20)	20	20
	Variable manufacturing overhead				(1*15)	15	15
	Fixed manufacturing overhead					25	50
						(1*25)	(1*50)
	Total					74	99
2						Q1	Q2	Q3	Q4	Total
	Pools manufactured and sold				a	565	490	245	100
	Direct manufacturing labor hour				b=1*a	565	490	245	100	1400
	Budgeted fixed manufacturing overhead					12250	12250	12250	12250	49000
	Fixed manufacturing overhead rate=Total budgeted fixed manufacturing overhead/Total direct manufacturing labor hour=49000/1400=$ 35 per hour
	Total manufacturing cost per unit:
						Q2	Q3
	Direct materials					14	14
	Direct labor				(1*20)	20	20
	Variable manufacturing overhead				(1*15)	15	15
	Fixed manufacturing overhead					35	35
						(1*35)	(1*50)
	Total					84	84
3	Prices=Total manufacturing cost*130%
	Based on Quarterly manufacturing overhead rate
						Q2	Q3
	Total manufacturing cost				a	74	99
	Price				a*130%	96.2	128.7
	Based on Annual manufacturing overhead rate
						Q2	Q3
	Total manufacturing cost				a	84	84
	Price				a*130%	109.2	109.2
	The reson in fluctuation of prices due to use of quarterly manufacturing overhead rate
	If the company uses manufacturing overhead rate based on annual production a steady price will be achieved
	Hence, it is better to use manufacturing overhead rate based on annual production