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: Quarter First Second Third Fourth Direct materials $240,000 $120,000 $ 60,000 $180,000 Direct labor 160,000 80,000 40,000 120,000 Manufacturing overhead 240,000 216,000 204,000 ? Total manufacturing costs (a) $640,000 $416,000 $304,000 $ ? Number of units to be produced (b) 120,000 60,000 30,000 90,000 Estimated unit product cost (a) + (b) $ 5.33 $ 6.93 $ 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. 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

Requirement (1) Fixed Manufacturing Overhead Cost $ 192,000 Working Note : Particulars Number of units produced Variable Manufacturing overhead per Unit Variable Manufacturing overhead cost (A) Total Manufacturing overhead cost (B) - Given Fixed Manufacturing overhead cost (B-A) $ $ $ $ First 120000 0.40 $ 48,000 $ 240,000 $ 192,000 $ Second 60000 0.40 $ 24,000 $ 216,000 $ 192,000 $ Third 30000 0.40 12,000 204,000 192,000 Requirement (2) Unit Product Cost $ 5.87 Working Note : Fixed Manufacturing overhead cost Variable Manufacturing overhead cost (90,000*$0.4) Manufacturing Overhead Add : Direct Material Direct Labour Total Manufacturing costs Number of Units Produced Unit Product Cost $ $ $ $ $ $ 192,000 36,000 228,000 180,000 120,000 528,000 90000 5.87 $ Requirement (3) The fixed portion of manufacturing overhead cost is causing the unit product cost 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 $ 6.29 Working Note : $ $ 1,888,000 Total Manufacturing Costs (640000+416000+304000+528000) Number of Units (120000+60000+30000+90000) Unit Product Cost 300000 $ 6.29 Note : Comment down for any further assistance/issues