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		80,000			40,000			20,000			60,000
Manufacturing overhead		230,000			206,000			194,000			?
Total manufacturing costs (a)	$	550,000		$	366,000		$	274,000		$	?
Number of units to be produced (b)		120,000			60,000			30,000			90,000
Estimated unit product cost (a) ÷ (b)	$	4.58		$	6.10		$	9.13		$	?

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)

	First	Second	Third	Fourth
Total Manufacturing overhead (A)	$230000	$206000	$194000	$218000
Number of units to be produced	120000	60000	30000	90000
Estimated variable manufacturing overhead cost per unit	$0.40	$0.40	$0.40	$0.40
Total Estimated variable manufacturing overhead cost (B)	$48000	$24000	$12000	$36000
Total Estimated Fixed manufacturing overhead cost (A-B)	$182000	$182000	$182000	$182000

Total Manufacturing overhead for quarter 4 = $182000 + $36000 = $218000

(2) Total Manufacturing overhead cost for 4^th quarter = Direct Material + Direct Labor + Manufactruing overhead

    = $180000 + $60000 + $218000 = $458000

Unit product cost = Total Manufacturing overhead cost/Unit produced

          = $458000/90000 units = $5.09

(3) Unit product cost is fluctuating due to Manufacturing fixed overhead cost. Because fixed overhead cost is constant but Units to be produced are increase or decrease.

(4) Total Manufactruing cost for the year = $550000 + $366000 + $274000 + $458000 = $1648000

Total units to be produced = 120000 + 60000 + 30000 + 90000 = 300000

Unit product cost = $1648000/300000 = $5.49