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 $240,000 $120,000 $ 60,000 $180,000 120,000 60,000 30,000 90,000 220,000 196,000 184,000 $580,000 $376,000 $274,000 80,000 40,000 20,000 60,000 $ 7.25 $ 9.40 $ 13.70 $ 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. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 What is causing the estimated unit product cost to fluctuate from one quarter to the next? The fixed portion of the manufacturing overhead cost is causing the unit product costs to fluctuate. The unit product cost increases as the level of production decreases because the fixed overhead is spread over fewer units. The fixed portion of the manufacturing overhead cost is causing the unit product costs to fluctuate. The unit product cost decreases as the level of production decreases because the fixed overhead is spread over fewer units. The variable portion of the manufacturing overhead cost is causing the unit product costs to fluctuate. The unit product cost increases as the level of production decreases because the variable overhead is spread over fewer units The variable portion of the manufacturing overhead cost is causing the unit product costs to fluctuate. The unit product cost decreases as the level of production decreases because the variable overhead is spread over fewer units.

Answer 1

1.

Answer: 172,000

Calculation:

Total over head cost-First quarter)	220,000
Variable cost [note 1]	48000
Fixed cost	172,000

[Note 1]= $0.60 per unit *80,000 units

2.

Answer: 7.97

Calculation:

Y = $172,000 + ($0.60 per unit)*(60,000 units)

Estimated fixed manufacturing overhead	172,000
Estimated Variable manufacturing overhead [note 2]	36000
Estimated total manufacturing overhead	208,000

[Note 2]= $0.60 per unit *60,000 units

The estimated unit product cost for the fourth quarter is computed as follows:

Direct materials	$180,000
Direct labor	90,000
Manufacturing overhead	208,000
Total manufacturing costs (a)	$478,000
Number of units to be produced (b)	60,000
unit product cost (a/ b)	$7.97

3.

Answer: The fixed portion of the manufacturing overhead cost is causing the unit product costs to fluctuate. The unit product cost increases as the level of production decreases because the fixed overhead is spread over fewer units.

4.

Answer: 8.54

Calculation:

Estimated fixed manufacturing overhead[Note 3]	688000
Estimated Variable manufacturing overhead [note 4]	120000
Estimated total manufacturing overhead	808000

Y = $688,000 + 0.60 per unit × 200,000 units

[Note 3]= Annual fixed manufacturing overhead is $688,000 ($180,000 per quarter × 4 quarters)

[Note 4]= $0.60 per unit *200,000 units

The annual predetermined overhead rate is computed as follows:

Estimated total manufacturing overhead (a)	808000
Estimated Number of units produced (b)	200000
Predetermined overhead rate (a/b)	4.04

Using a predetermined overhead rate of $4.04 per unit, the unit product costs would stabilize as shown below:

	First Quarter	Second Quarter	Third Quarter	Fourth Quarter
Direct materials	$240,000	$120,000	$60,000	$180,000
Direct labor	120,000	60,000	30,000	90,000
Manufacturing overhead (4.24 per unit	323,200	161,600	80,800	242,400
Total manufacturing costs (a)	$683,200	$341,600	$170,800	$512,400
Number of units to be produced (b)	80,000	40,000	20,000	60,000
Estimated unit product cost (a + b)	$8.54	$8.54	$8.54	$8.54