Question

Kingsport Containers, Ltd. of the Bahamas experiences wide variation in demand for the 200-litre steel drums it fabricates. The leakproof, rustproof steel drums have a variety of uses, from storing liquids and bulk materials to serving as makeshift musical instruments. The drums are made to order and are painted according to the customer's specifications—often in bright patterns and designs. The company is well known for the artwork that appears on its drums. Unit costs are computed on a quarterly basis by dividing each quarter's manufacturing costs (materials, labour, and overhead) by the quarter's production in units. The company's estimated costs, by quarter, for the coming year are as follows: Quarter Direct materials Direct labour Manufacturing overhead First $ 260,000 200,000 320,000 Second $ 130,000 100.000 240,000 Third $ 65,000 50,000 190,000 Fourth $ 195,000 150,000 290,000 Total manufacturing costs $ 780,000 $470,000 $ 305,000 $635,000 Number of units to be produced Estimated cost per unit $ 80.000 9.75 $ 40,000 11.75 $ 20.000 15.25 $ 60.000 10.58 Management finds the variation in unit costs to be confusing and difficult to work with. It has been suggested that the problem lies with manufacturing overhead, since it is the largest element of cost. Accordingly, you have been asked to find a more appropriate way of assigning manufacturing overhead cost to units of product. After some analysis, you have determined that the company's overhead costs are mostly fixed and therefore show little sensitivity to changes in the level of production. Required: 1. What would be the predetermined manufacturing overhead rate for the year on the basis of total units to be produced? (Round your answer to 2 decimal places.) Predetermined overhead rate per unit 2. Recompute the company's unit costs in accordance with your recommendations in part (1). (Round "Unit product cost" to 2 decimal places.) Quarter First Second Third Fourth Direct materials Direct labour Manufacturing overhead Total cost Number of units produced Unit product cost $ 0 $ 0 $ 0 $

Answer 1

1) As the company's overhead costs are mostly fixed and less
sensitivity to changes in the level of production, so it would
be appropriate to allocate the overheads in the ratio of Produced
units per quarter. So,
Predetermined manufacturing overhead rate =
Total overhead costs / Total units produced =
(320000+240000+190000+290000)/ (80000+40000+20000+60000) =
5.20 per unit produced
2) Unit cost of production (revised):
	Quarter
	First	Second	third	Fourth
Direct Material	260000	130000	65000	195000
Direct Labour	200000	100000	50000	150000
Manufacturing overhead	416000	208000	104000	312000
Total Cost	876000	438000	219000	657000
Number of units produced	80000	40000	20000	60000
Unit product cost, $	10.95	10.95	10.95	10.95