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 120,000 60,000 30,000 90,000 Manufacturing overhead 240,000 216,000 204,000 ? Total manufacturing costs (a) $ 600,000 $ 396,000 $ 294,000 $ ? Number of units to be produced (b) 120,000 60,000 30,000 90,000 Estimated unit product cost (a) ÷ (b) $ 5.00 $ 6.60 $ 9.80 $ ? 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. Calculation of estimated Total Fixed manufacturing overhead cost per quarter -

		First	Second	Third	Fourth
Direct materials	variable	240000	120000	60000	180000
Direct labor	variable	120000	60000	30000	90000
Manufacturing Overhead	variable	48000	24000	12000	36000
	Fixed	192000	192000	192000	192000
Total Cost		600000	396000	294000	498,000
Output		120000	60000	30000	90000
Total Cost per unit		5.00	6.77	9.80	5.54

Note - Manufacturing variable overhead = 0.40* Output units

and Manufacturing fixed cost = Total manufacturing cost - manufacturing variable overhead

2. Given in above calculation Estimated unit product cost for the fourth quarter = $ 5.54

3. Produced/Output units causing the estimated unit product cost to fluctuate from one quarter to the next.

4.Total Manufacturing costs for the year = $600,000 + $396,000+ $294,000+ $498,000 = $17,88,000

Total Units Produced = $120,000+ $60,000+ $30,000+ $ 90,000 = $ 300,000

Unit product cost = $17,88,000/300000 = $ 5.96