Question

Space Manufacturing produces surfboards. The company uses a normal-costing system and allocates manufacturing overhead on the basis of direct manufacturing labor-hours. Most of the company's production and sales occur in the first and second quarters of the year. The company is in danger of losing one of its larger customers, Solar Wholesale, due to large fluctuations in price. The owner of Space has requested an analysis of the manufacturing cost per unit in the second and third quarters. You have been provided the following budgeted information for the coming year: BB(Click the icon to view the budgeted information.) (Click the icon to view additional information.) Read the requirements Requirement 1 and 2. Calculate the total manufacturing cost per unit for the second and third quarter assuming the company allocates manufacturing overhead costs based on the budgeted manufacturing overhead rate determined for each quarter and an annual budgeted manufacturing overhead rate. First identify the formula to calculate the total manufacturing cost per unit, then enter the appropriate amounts to calculate the total cost per unit for second and third quarter based on the budgeted manufacturing overhead rate determined for each quarter and an annual budgeted manufacturing overhead rate for the year. (Abbreviation used: OH = overhead, mat. - materials, and Var. variable) Total cost per unit - Qtr 2 Qtr 3 Annual

Answer 1

1		Quarters
		1	2	3	4	Annual
	Pools sold	565	360	150	125	1200
	Direct manufacturing labor hours	565	360	150	125	1200
	(1*Pools sold)
	Fixed manufacturing overhead cost	$9,000	$9,000	$9,000	$9,000	$36,000
	Budgeted fixed manufacturing overhead	$15.93	$25.00	$60.00	$72.00	$30.00
	rate per direct manufacturing labor hours
	(Fixed manufacturing overhead cost/Direct manufacturing labor hours)
		Budgeted costs based on quaterly manufacturing overhead rate
		2nd quarter	3rd quarter
	Direct material cost	$4,320.00	$1,800.00
	($12*360;150)
	Direct manufacturing labor costs	$9,360.00	$3,900.00
	($26*360,150)
	Variable manufacturing overhead costs	$6,840.00	$2,850.00
	($19*360;150)
	Fixed manufacturing overhead costs	$9,000.00	$9,000.00
	($25*360; $60*150)
	Total manufacturing cost	$29,520.00	$17,550.00
	Divided by pools manufactured by quarter	360	150
	Manufacturing cost per pool	$82.00	$117.00
2		Budgeted costs based on annual manufacturing overhead rate
		2nd quarter	3rd quarter
	Direct material cost	$4,320.00	$1,800.00
	($12*360;150)
	Direct manufacturing labor costs	$9,360.00	$3,900.00
	($26*360,150)
	Variable manufacturing overhead costs	$6,840.00	$2,850.00
	($19*360;150)
	Fixed manufacturing overhead costs	$10,800.00	$4,500.00
	($30*360;150)
	Total manufacturing cost	$31,320.00	$13,050.00
	Divided by pools manufactured by quarter	360	150
	Manufacturing cost per pool	$87.00	$87.00
3		2nd quarter	3rd quarter
	Prices based on quaterly budgeted manufacturing	98.4	140.4
	overhead rates calculated in requirement 1
	($82*120%; $117*120%)
	Prices based on annual budgeted manufacturing	104.4	104.4
	overhead rates calculated in requirement 2
	($87*120%; $87*120%)

Solar wholesale be seeing large fluctuation in the prices of boards because Space manufacturing is determining its budgeted manufacturing overhead rates for boards on a quarterly basis rather than on annual basis. Space should use annual budgeted manufacturing overhead rate because it is better to take decision based on longer annual periods rather than shorter quarterly periods. The main reason for the annual budgeted manufacturing overhead rate is the quantity of boards fluctuating on quarterly basis is very high.

Space should vary prices based on its quarterly fluctuation in production. It can vary prices based on market condition for demand. In this case, it can charge higher prices in 1^st and 2^nd quarter, when the demand is high.