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		160,000			80,000			40,000			120,000
Manufacturing overhead		240,000			216,000			204,000			?
Total manufacturing costs (a)	$	680,000		$	436,000		$	314,000		$	?
Number of units to be produced (b)		160,000			80,000			40,000			120,000
Estimated unit product cost (a) ÷ (b)	$	4.25		$	5.45		$	7.85		$	?

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.

	Quarter
	First
Manufacturing overhead	240000
Less: Variable manufacturing overhead cost	48000
(160000 x $0.30)
Fixed manufacturing overhead cost per quarter	192000

2.

	Quarter
	Fourth
Direct materials	210000
Direct labor	120000
Manufacturing overhead [$192000 + (120000 x $0.30)]	228000
Total manufacturing costs (a)	558000
Number of units to be produced (b)	120000
Estimated unit product cost (a)/(b)	4.65

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

4.

Direct materials	700000
Direct labor	400000
Manufacturing overhead	888000
Total manufacturing costs (a)	1988000
Number of units to be produced (b)	400000
Estimated unit product cost (a)/(b)	4.97