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 $280.000 $140,000 $70,000 $210,000 160,000 80,000 40,000 120.000 230,000 206,000 194,000 5670,000 $426,000 $300.000 3 ? 120,000 60,000 30.000 90.000 $ 5.585 7.10 $ 10.13 $ 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.

Answer 1

Answer

• Requirement 1

Fixed manufacturing overhead cost = $ 182,000

--Working

		Q1	Q2	Q3
A	Units	120000	60000	30000
B	Variable manufacturing overhead per unit	$0.40	$0.40	$0.40
C = A x B	Total variable manufacturing overhead	$48,000	$24,000	$12,000
D	Total Manufacturing overhead cost	$230,000	$206,000	$194,000
E = D - C	Fixed manufacturing overhead cost	$182,000	$182,000	$182,000

• Requirement 2

Unit product cost = $ 6.09

	Q4
Direct material ($ 2.3333 per unit)	$210,000
Direct Labor ($1.3333 per unit)	$120,000
Variable manufacturing overhead ($0.40 per unit)	$36,000
Fixed manufacturing overhead	$182,000
Total product cost	$548,000
Total units Q4	90000
Unit Product Cost	$6.09

• Requirement 3

Option #1:
The FIXED portion of the manufacturing overhead cost is causing the unit product to fluctuate. The unit product cost increases as the level of production decreases because the fixed overhead is spread over fewer units.

• Requirement 4

Unit product cost = $ 6.49

>Total Fixed overhead = $ 182000 x 4 quarters = $ 728,000
>Total units = 120000 + 60000 + 30000 + 90000 = 300000
>Fixed overhead cost per unit = $ 728000 / 300000 = $ 2.43 per unit

Direct Material unit cost	$2.33
Direct Labor unit cost	$1.33
Variable manufacturing overhead per unit	$0.40
Fixed manufacturing overhead	$2.43
Unit product cost	$6.49 ANSWER