Question

Kingsport Containers Company makes a single product that is subject to wide seasonal variations in demand. The company uses a job-order costing system and computes plantwide predetermined overhead rates on a quarterly basis using the number of units to be produced as the allocation base its estimated costs, by quarter, for the coming year are given below! Direct materials Direct labor Manufacturing overhead Total manufacturing costs (a) Number of units to be produced (b) Estimated unit product cost (a) + (b) Quarter First Second Third Fourth $320,000 $160,000 $ 80,000 $240,000 120,000 60,000 30,000 90.000 230,000 206.000 194,000 $670,000 $426,000 $300.000 $ 80,000 40,000 20,000 60,000 $ 8.38 10.65 5 15.20 $ Management finds the variation in quarterly unit product costs to be confusing and difficult to work with. It has been suggested that the problem lies with manufacturing overhead because it is the largest element of total manufacturing cost. Accordingly, you have been asked to find a more appropriate way of assigning manufacturing overhead cost to units of product. Required: 1. Assuming the estimated variable manufacturing overhead cost per unit is $0.60, what must be the estimated total fixed manufacturing overhead cost per quarter? 2. Assuming the assumptions about cost behavior from the first three quarters hold constant. what is the estimated unit product cost for the fourth quarter? 3. What is causing the estimated unit product cost to fluctuate from one quarter to the next? 4. Assuming the company computes one predetermined overhead rate for the year rather than computing quarterly overhead rates calculate the unit product cost for all units produced during the year

Answer 1

Sol (1) The estimated totaal fixed Manufacturing Overhead Can be computed using the daka from any of quarters 1-3 for Illustrative purposes, we'll Use the first quarter as follows: I Particulars Totaal Overhead Ceist Cfirst Quarter) Less: Variable Cost Element Amount $ 230,000 $ (48,000) fixed Cast Element $ 182,000

Sol, (2) The fixed and Variable Cost estimates from requirement 1 can be used to estimate the totaal Manufacturing Overhead Cost for the forth quarter as followso. Amount $ 182,000 Particular's Estimated fixed Manufacturing Overhead Addo - Estimated variable Manufacturing - Overhead Estimated To toul Manufacturing Overhead $ 36,000 8.000 CANG The estimated unit product Cost for the forth quarter is Computed as follow's :- Particulars - Amout Direct Matericul's $240,000 Direct labor $ 90.000 Manufacturing Overhead $ 218.000 Total Manufacturing Costs (al $ 548.000 Number of units to be produced (b) 60,000 Estimaalased vuit product Cart (01):6) $9.13

Sol (3) The fixed portion of the manufacturing Overhead Cost is causing the unit porodi Cost to fluctuate, causing the unit product The unit product Cost Increases as the level of production decreases because the fixed Overhead is spread over fewer unite

Sol. (4) The unit product Cost can be stablized by Using a predetermined Overhead rate that is based on expected activity of the entire year. The Cost formula Created in requirement 1 can be adapted to compute the annual predetermined Overhead rete. The annual fixed Manufacturing overhead is $ 728,000 ($182,000 per quarter& 4 quarter) The Variable manufacturing Overhead per unit is $0.60. The Cost formuller is as follows: - Particulars I Amounta Estimated fixed Manufacturing Overhead $728,000 Estimated Variable Manufacturing Overhead $ 120,000 Estimated To toul Manufacturing Overhead Costl $ 848,000 The annual predetermined Overhead Role is computed as follow's :- - Particulars | Amount A. Estimated Potaal Manufackening Overhead $848,000 B. Estimated Potent units produced 200,000 c. Predetermined Overhead Rase A+B $4.24

Using a predetermined Overhead rate of $4.24 Per Unit, the Unil product costs would Stabelive as shown belowo- Particulars first Second Thind fourth Direel-Materials ad $ 320,000 $160,000 $80,000 $240,000 Direck labor : 120,000 60,000 30000 90,000 Manufacturing Overhead al $ 6.24V Spren limita 339200 169,600 84,800 254,400 Total Cost cas | 779,200 389,600 194,800 584,400 Number Oyunil's broderede 80.000 40.000 20.000 60,000 Unit Product last (at) $9.74 $9.94 $9.74 $9.74 CHOICE

wild Worlaing Netcon (1) Nariable Cast Elementa & Number of unit produced & Cost per vuit 3 80,000 Vuilas X $0.60 - $ 48,000 (2) Estimate al Verricabile Manufacturing Overhead> = Number of mile produced & Cost per munt E 60,000 Vuit's x $0.60 = $ 36,000 (③) Estimated Variable Manufacturing Overhead> - Totaal Unit produced in four Quarters & Unit cost 200,000 Units X $0.60 un $120,000

Manufacturing Overhead at $4.24 percenta) first Quarter a) = Numbxa of unit produced x $4.24 = 80,000 X $ 4.24 = $ 339,200 Second Quenter> = 40,070 vuila's x $4.24 _ = $169,600 Third Quarter 2) Ĉ 20,000 Vuilles X $ 4.24 $84,800 Fourth Quenter as Goois vuilis x $ 4.24 $ 254,400 _