Question

Exercise 2-11 (Algo) Varying Plantwide Predetermined Overhead Rates (LO2-1, LO2-2, LO2-3] 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 $320,000 $160,000 $ 80,000 $240,000 Direct labor 120,000 60,000 30,000 90,000 Manufacturing overhead 220,000 196,000 184,000 ? Total manufacturing costs (a) $660,000 $416,000 $294,000 $ ? Number of units to be produced (b) 120,000 60,000 30,000 90,000 Estimated unit product cost (a) = (b) $ 5.50 $ 6.93 $ 9.80 $ ? Management finds the variation in quarterly unit product costs to be confusing. 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. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 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. (Do not round intermediate calculations and round the "Unit product cost" to 2 decimal places.) Unit product cost < Required 3 Required 4

Answer 1

1)
Total overhead cost (First quarter)	$ 220,000.00
Variable cost element (($0.40 per unit ×120,000 units)	$   48,000.00
Fixed Cost element	$ 172,000.00
2)
Total manufacturing costs (Y) =  FC + Vc x units Produced
Total manufacturing costs (Y) =  $172,000 + $.40 x 90,000 units	$ 208,000.00
	Fourth Quarter
Direct materials	$ 240,000.00
Direct labor	$   90,000.00
Manufacturing overhead	$ 208,000.00
Total manufacturing costs (a)	$ 538,000.00
Number of units to be produced (b)	90,000
Estimated unit product cost (a + b)	$5.98
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)
Total Annual Fixed Cost = $172,000 x 4	$ 688,000.00
Annual Production (120,000+60000+30000+90000)	300,000
Total manufacturing costs (Y) =  FC + Vc x units Produced
Total manufacturing costs (Y) =  688000 + .40 x 300,000	$ 808,000.00
Estimated total manufacturing overhead cost (a)	$ 808,000.00
Estimated total units produced (b)	300,000
Predetermined overhead rate (a) ÷ (b)	$            2.69	per unit
	First Quarter	Second Quarter	Third Quarter	Fourth Quarter
Direct materials	$ 320,000.00	$ 160,000.00	$   80,000.00	$ 240,000.00
Direct labor	$ 120,000.00	$   60,000.00	$   30,000.00	$   90,000.00
Manufacturing overhead (units produced x $2.69)	$ 323,200.00	$ 161,600.00	$   80,800.00	$ 242,400.00
Total manufacturing costs (a)	$ 763,200.00	$ 381,600.00	$ 190,800.00	$ 572,400.00
Number of units to be produced (b)	120,000	60,000	30,000	90,000
Estimated unit product cost (a + b)	$6.36	$6.36	$6.36	$6.36