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 $280,000 $140,000 $ 70,000 $210,000 Direct labor 120,000 60,000 30,000 90,000 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) 160,000 80,000 40,000 120,000 Estimated unit product cost (a) = (b) $ 4.00 $ 5.20 $ 7.60 $ ? 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 $0.30, 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) Computation of fixed manufacturing overhead cost per quarter

Fixed manufacturing overhead

=Total manufacturing overhead-variable manufacturing overhead

=[$240000 - (160000*$0.30) ]

=$240000-$48000

=$192000

2) Computation of the estimated unit product cost for the fourth quarter

Estimated unit product cost for the fourth quarter

=Total manufacturing costs / Number of units produced

=$528000/120000

=$4.4 per unit

Working notes

1) Total manufacturing costs for the fourth quarter

particulars	Amount($)
Direct materials	210000
Direct labor	90000
Variable Manufacturing overhead {120000*$0.30}	36000
Fixed Manufacturing overhead	192000
Total manufacturing costs	528000

3) Cause of estimated unit product cost to fluctuate from one quarter to the next

The change in fixed portion of manufacturing overhead cost causing the estimated unit product cost to fluctuate from one quarter to the next quarter.

This is because the fixed manufacturing overhead remains same irrespective of level of production activity. If there is an increase in production output units, the average fixed cost per unit decreases and viceversa.

4) Calculation of the unit product cost for all units producing during the year

Formula:

Unut product cost

=Total manufacturing costs for the year / Total units produced

=$1888000/400000

=$4.72 per unit

Working note:

1) Total manufacturing costs for the year

particulars	Amount($)
First quarter	640000
Second quarter	416000
Third quarter	304000
Fourth quarter	528000
Total manufacturing costs for the year	1888000

2) Total units produced

Particulars	Amount($)
First quarter	160000
Second quarter	80000
Third quarter	40000
Fourth quarter	120000
Total units produced	400000

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