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 $200,000 $100,000 $ 50,000 $150,000 80,000 40,000 20,000 60,000 220,000 196,000 184,000 $500,000 $336,000 $254,000 $ 120,000 60,000 30,000 90,000 $ 4.17 $ 5.60 $ 8.47 $ ? 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 Required 1 Required 2 >

Answer 1

1.

Fixed manufacturing overhead cost = Manufacturing overhead - Variable manufacturing overhead

Fixed manufacturing overhead cost = $220,000 - 120,000*$0.40

Fixed manufacturing overhead cost = $220,000 - 48,000 = $172,000

2.

Fourth Quarter
Direct materials	$150,000
Direct labor	60,000
Manufacturing overhead (90,000*$0.40+172,000)	208,000
Total manufacturing cost	$418,000
Units to be produced	90,000
Unit product cost	$4.64

3.

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

4.

Predetermined overhead rate = Estimated manufacturing overhead / Estimated units produced

Predetermined overhead rate = $808,000 (220,000+196,000+184,000+208,000) / 300,000 (120,000+60,000+30,000+90,000)

Predetermined overhead rate = $2.69

Direct materials	$500,000
Direct labor	200,000
Manufacturing overhead (300,000*$2.69)	807,000
Total manufacturing cost	1,507,000
Units to be produced	300,000
Unit product cost	$5.02