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	$	280,000		$	140,000		$	70,000		$	210,000
Direct labor		120,000			60,000			30,000			90,000
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 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 $0.60, 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?

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

Solution 1:

Estimated total fixed manufacturing overhead cost per quarter = Total Manufacturing Overhead of first quarter - (Number of units to be produced first quarter * variable manufacturing overhead cost per unit)

= $230,000 - (80,000*$0.60)

= $230,000 - $48,000

= $182,000

Solution 2:

Estimated total manufacturing overheads for fourth quarter = Fixed Manufacturing Overhead + Variable manufacturing Overhead = $182,000 + (60000 * $0.60) = $218,000

Total manufacturing costs for the fourth quarter = $210,000 + $90,000 + $218,000

= $518,000

Number of units produced in fourth quarter = 60,000

Estimated unit product cost for fourth quarter = Total manufacturing costs / Number of units produced

= $518,000 / 60000

= $8.63

Solution 3:

For all the quarters, the fixed manufacturing overhead cost is constant ($182,000). Fixed cost per unit decrease with increase in units produced and vice versa. Thus, the fluctuation of estimated unit product cost from one quarter to another is caused by the Fixed Manufacturing Overhead cost.

Solution 4:

Total manufacturing costs for the year = $630,000 + $406,000 + $294,000 + $518,000 = $1,848,000

Total number of units produced in the year = 80000 + 40000 + 20000 + 60000 = 200000

Unit product cost for the year = $1,848,000 / 200000 = $9.24