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		220,000			196,000			184,000			?
Total manufacturing costs (a)	$	580,000		$	376,000		$	274,000		$	?
Number of units to be produced (b)		160,000			80,000			40,000			120,000
Estimated unit product cost (a) ÷ (b)	$	3.63		$	4.70		$	6.85		$	?

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. fixed manufacturing overhead cost per quarter:

for quarter 1 :

estimated variable manufacturing overhead is ($ 0.30 * 160,000 units) $ 48,000.

Fixed manufacturing overhead is ($ 220,000 - $ 48,000) $ 172,000

2. estimated unit product cost for the fourth quarter:

$ 3.98

	$
Direct materials	150,000
Direct labor	120,000
Manufacturing overhead [172,000+( $ 0.3 * 120,000)]	208000
Total manufacturing costs (a)	478,000
Number of units to be produced (b)	120,000
Estimated unit product cost (a) ÷ (b)	3.98

3. Fixed manufacturing overhead is causing the estimated unit product cost to fluctuate from one quarter to the next.

4. Computation of one predetermined overhead rate for the year:

= Total manufacturing costs / Number of units to be produced

= $ 8,08,000 / 4,00,000

= $ 2.02

Workings

	First	Second	Third	Fourth	TOTAL
	$	$	$	$	$
Direct materials	200,000	100,000	50,000	150,000	500,000
Direct labor	160,000	80,000	40,000	120,000	400,000
Manufacturing overhead	220,000	196,000	184,000	208000	808000
Total manufacturing costs (a)	580,000	376,000	274,000	478,000	1,708,000
Number of units to be produced (b)	160,000	80,000	40,000	120,000	400,000
Estimated unit product cost (a) ÷ (b)	3.63	4.7	6.85	3.98	4.27