Question

Exercise 2-11 Varying Plantwide Predetermined Overhead Rates [LO2-1, LO2-2, LO2-3]

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:

   

	Quarter
	First			Second			Third			Fourth
Direct materials	$	280,000		$	140,000		$	70,000		$	210,000
Direct labor		80,000			40,000			20,000			60,000
Manufacturing overhead		240,000			216,000			204,000			?
Total manufacturing costs (a)	$	600,000		$	396,000		$	294,000		$	?
Number of units to be produced (b)		120,000			60,000			30,000			90,000
Estimated unit product cost (a) ÷ (b)	$	5.00		$	6.60		$	9.80		$	?

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.

Answer 1

1)								Manufacturing
								Dollars	Units
	High Values							$240,000	120,000			$240,000
	Low Values							204,000	30,000		Minus variable MOH	48,000
	Change in Costs							$36,000	90,000		Fixed MOH	$192,000
	Variable MOH cost per unit									$0.40
	Fixed MOH cost per quarter							$192,000	$192,000
	Answer)	$192,000
2)								Fourth
	Direct Materials							$210,000
	Direct Labor							60,000
	Manufacturing Overhead							228,000
		Total Manufacturing Costs						$498,000
	units produced							90,000
	Estimated unit product cost							$5.53
3)	fixed overhead rate per unit increase with decrease in production and decreases with increase in
	production , thus estimated unit product cost fluctuates with change in units produced
4)	Fixed overhead cost for the year				(192000*4)=			$768,000
	Estimated units produced							300000
	fixed overhead cost per unit							$2.56
	Variable overhead cost per unit							0.4
	total manufacturing cost per unit							$2.96
	unit product cost
	direct materials						2.333333
	Direct labor						0.666667
	Manufacturing overhead						2.96
	unit product cost						5.96