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	$	240,000		$	120,000		$	60,000		$	180,000
Direct labor		160,000			80,000			40,000			120,000
Manufacturing overhead		230,000			206,000			194,000			?
Total manufacturing costs (a)	$	630,000		$	406,000		$	294,000		$	?
Number of units to be produced (b)		80,000			40,000			20,000			60,000
Estimated unit product cost (a) ÷ (b)	$	7.88		$	10.15		$	14.70		$	?

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 $0.60, 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?

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

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. Estimated total manufacturing OH per Quarter is calculated as

FMOH = TMOH - VMOH = 230000- (80000*0.6) = $182000

2. Estimated unit product cost for 4th Quarter is calculated as

Total Manufacturing Costs / No. Of units produced

=180000+120000+(60000*0.6)+182000/60000 = 518000/60000 = 8.63

3.FOH rate per unit increases with Decrease in production and vice versa. Fixed portion of MOH is reason for unit product cost to deviate.  unit production costs increases with level of production decrease because FOH is spread over only few units of production.

4. Calculation of unit product costs for all the units produced during the year

Total Manufacturing Costs = $630000+406000+294000+518000 = $1848000

Total units produced =80000+40000+20000+60000 = 200000

Unit product cost = $1848000/200000 = 9.24 per unit