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 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	$	240,000	$	120,000	$	60,000	$	180,000
Direct labor		120,000		60,000		30,000		90,000
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-a.	Using the high-low method, estimate the fixed manufacturing overhead cost per quarter and the variable manufacturing overhead cost per unit. (Round the "Variable manufacturing overhead per unit" to 2 decimal places.)

          

1-b.	Compute the total manufacturing cost and unit product cost for the fourth quarter. (Round the "Unit product cost" to 2 decimal places.)

       

3.	Estimate the total manufacturing overhead cost for the year and an annual predetermined overhead rate. (Round the "Predetermined overhead rate" to 2 decimal places.)

     

Answer 1

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Kingsport Containers Company:
Particulars	1st Quarter	2nd Quarter	3rd Quarter	4th Quarter
Number of units to be produced	160,000.00	80,000.00	40,000.00	120,000.00	A
Direct Materials cost	240,000.00	120,000.00	60,000.00	180,000.00	B
Direct Materials cost per unit	1.50	1.50	1.50	1.50	C=B/A
Direct Labor cost	120,000.00	60,000.00	30,000.00	90,000.00	D
Direct Labor cost per unit	0.75	0.75	0.75	0.75	E=D/A
For High Low method we will take highest units produced and lowest units produced with the manufacturing overhead incurred
Manufacturing Overhead	240,000.00	216,000.00	204,000.00
Highest Units	160,000.00
Lowest Units			40,000.00
Variable Manufacturing Overhead per unit= (Difference between the cost)/(Difference between units)
=	(240,000-204,000)/(160,000-40,000)
=	0.30
Fixed Manufacturing Overhead= Total Manufacturing Overhead- (Variable manufacturing overhead*Units)
=	240,000-(.30*160,000)
Fixed Manufacturing Overhead=	192,000.00
Ans to 1 a
Fixed Manufacturing Overhead per quarter is $ 192,000.
Variable Manufacturing Overhead cost per unit= $ .30.
Ans to 1 b
Variable Manufacturing Overhead cost for 4th quarter:			36,000.00	(120,000*.30)
Fixed Manufacturing Overhead			192,000.00
Total manufacturing Overhead			228,000.00
Cost Statement for 4th quarter:
Particulars	4th Quarter
Number of units to be produced	120,000.00	F
Direct Materials cost	180,000.00
Direct Labor cost	90,000.00
Total manufacturing Overhead	228,000.00
Total manufacturing costs	498,000.00	G
Unit Product cots	4.15	H=G/F
Ans to 1 c	Manufacturing Overhead		Number of units to be produced
1st Quarter	240,000.00		160,000.00
2nd Quarter	216,000.00		80,000.00
3rd Quarter	204,000.00		40,000.00
4th Quarter	228,000.00		120,000.00
Total	888,000.00		400,000.00
Manufacturing Overhead cost per unit			2.22	(888,000/400,000)
Total manufacturing Overhead cost for the year is $ 888,000.
Annual predetermined overhead rate is $ 2.22 per unit.