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	$	160,000		$	80,000		$	40,000		$	120,000
Direct labor		120,000			60,000			30,000			90,000
Manufacturing overhead		230,000			206,000			194,000			?
Total manufacturing costs (a)	$	510,000		$	346,000		$	264,000		$	?
Number of units to be produced (b)		120,000			60,000			30,000			90,000
Estimated unit product cost (a) ÷ (b)	$	4.25		$	5.77		$	8.80		$	?

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 $0.40, 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.

Answer 1

1
Particulars	Q1	Q2	Q3
Variable Cost Per unit	0.4	0.4	0.4
No of units	120000	60000	30000
Total variable Cost	48000	24000	12000
Total Manufacturing Cost	230000	206000	194000
Fixed Cost (B-A)	182000	182000	182000

2
Particulars	Q1	Q2	Q3	Q4
Direct Material	160000	80000	40000	120000
Direct Labour	120000	60000	30000	90000
Prime Cost	280000	140000	70000	210000
Variable Maufacturing	48000	24000	12000	36000
Fixed Maufacturing	182000	182000	182000	182000
Total Cost	510000	346000	264000	428000
No of units	120000	60000	30000	90000
Cost per Unit	4.25	5.77	8.8	4.76
Estimed unit Cost for Q4 is 4.76

3.

The Cost per unit of a product is dfferent from each quarter because there is increase or decrease in no of units but the fixed cost remain constant in each quarter.

4
Particulars	Q1	Q2	Q3	Q4	Total
Direct Material	160000	80000	40000	120000	400000
Direct Labour	120000	60000	30000	90000	300000
Prime Cost	280000	140000	70000	210000	700000
Variable Maufacturing	48000	24000	12000	36000	120000
Fixed Maufacturing	182000	182000	182000	182000	728000
Total Cost	510000	346000	264000	428000	1548000
No of units	120000	60000	30000	90000	300000
Cost per Unit	4.25	5.77	8.8	4.76	5.16