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 $160,000 $ 80,000 $ 40,000 $120,000 120,000 60,000 30,000 90,000 230,000 206,000 194,000 $510,000 $346,000 $264,000 $ ? 120,000 60,000 30,000 90,000 $ 4.25 $ 5.77 $ 8.80 $ ? 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 $0.40, 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 Assuming the estimated variable manufacturing overhead cost per unit is $0.40, what must be the estimated total fixed manufacturing overhead cost per quarter? Fixed manufacturing overhead cost

Answer 1

1.

Particulars	First	Second	Third	Fourth
Units Produced (A)	120,000	60,000	30,000	90,000
Variable manufacturing overhead per unit (B)	$0.40	$0.40	$0.40	$0.40
Total variable manufacturing overheads [C = A × B]	$48,000	$24,000	$12,000	$36,000
Total Manuafcturing overheads (D)	$230,000	$206,000	$194,000
Fixed Manufacturing [E = D-C]	$182,000	$182,000	$182,000

Estimated total fixed manufacturing overhead cost per quarter = $182,000

________________________________________________________________________

2.

Estimated total manufacturing overheads for fourth quarter	$218,000
[$182,000 + (90,000 × $0.40)]
Total manufacturing cost for the fourth quarter (A)	$428,000
($120,000 + $90,000 + $218,000)
Number of units produced in the fourth quarter (B)	90000
Estimated unit product cost (A/B)	$4.76

_________________________________________________________________

3.

Fixed manufacturing overhead is fixed in all the quarters. although per-unit fixed cost decrease with the increase in units produced and vice versa. Therefore, manufacturing overhead cost is the main reason for cost fluctuation.

____________________________________________________________________

4.

Total manufacturing costs for the year (A)	$1,548,000
($510,000 + $346,000 + $264,000 + $428,000)
Total number of units produced in the year (B)	300,000
(120,000 + 60,000 + 30,000 + 90,000)
Unit product cost for all units during the year (A/B)	$5.16