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	$	200,000		$	100,000		$	50,000		$	150,000
Direct labor		160,000			80,000			40,000			120,000
Manufacturing overhead		240,000			216,000			204,000			?
Total manufacturing costs (a)	$	600,000		$	396,000		$	294,000		$	?
Number of units to be produced (b)		160,000			80,000			40,000			120,000
Estimated unit product cost (a) ÷ (b)	$	3.75		$	4.95		$	7.35		$	?

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

Answers

• All working forms part of the answer
• Requirement #1

Answer: Total fixed manufacturing overhead per quarter = $ 192,000

Working		First	Second	Third
A [given]	Number of units to be produced (b)	160,000	80,000	40,000
B [given]	Manufacturing overhead	$              240,000	$             216,000	$            204,000
C [given]	Variable Overhead cost per unit	$                     0.30	$                    0.30	$                   0.30
D = A x C	Total variable manufacturing overhead	$                48,000	$               24,000	$               12,000
E = B - D	Fixed manufacturing overhead	$              192,000	$             192,000	$            192,000

• Requirement #2

Answer = $ 4.15 per unit

Working		Fourth
A	Direct materials	$             150,000
B	Direct labor	$             120,000
C	Manufacturing overhead	$             228,000 [(120000 units x $ 0.30) + 192000]
D = A+B+C	Total manufacturing costs	$             498,000
E	Number of units to be produced	120,000
F = D/E	Estimated unit product cost	$                    4.15 = Answer

• Requirement #3

--The unit cost is fluctuation because:
No. of units produced are fluctuating.
As a result, Fixed Costs of $ 192000 that are fixed, gets distributed over changing no. of units.
Even though variable cost per unit remains fixed, fixed cost per unit changes with a change in no. of units produced.

• Requirement #4

Answer: Unit Product Cost = $ 4.47

		Quarter
Working		First	Second	Third	Fourth	TOTAL
A	Direct materials	$              200,000	$             100,000	$               50,000	$             150,000	$            500,000
B	Direct labor	$              160,000	$               80,000	$               40,000	$             120,000	$            400,000
C	Manufacturing overhead	$              240,000	$             216,000	$            204,000	$             228,000	$            888,000
D = A+B+C	Total manufacturing costs	$              600,000	$             396,000	$            294,000	$             498,000	$        1,788,000
E	Number of units to be produced	160,000	80,000	40,000	120,000	400,000
F = D/E	Estimated unit product cost	$                     3.75	$                    4.95	$                   7.35	$                    4.15	$                   4.47 = ANSWER