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. 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)

The estimated total fixed manufacturing overhead can be computed using the data from any of quarters 1-3. For illustrative purposes, we’ll use the first quarter as follows:

Total manufacturing overhead cost ( 1st quarter )	$ 230,000
Variable cost element ( $0.40 × 120,000)	$ 48,000
Fixed cost element	$ 182,000

2

.The fixed and variable cost estimates from requirement 1 can be used to estimate the total manufacturing overhead cost for the fourth quarter as follows:

Y = $182,000 + ($0.40 per unit)(90,000 units)

Estimated fixed manufacturing overhead	$ 182,000
Estimated variable manufacturing overhead ($ 0.40 × 90,000 )	$ 36, 000
Estimated Total manufacturing overhead cost	$ 218,000

The estimated unit product cost for the fourth quarter is computed as follows:

Direct material	$180.000
Direct labour	$60,000
Manufacturing overhead	$218,000
Total manufacturing cost	$458,000
No. of units to be produced	90,000
Unit product cost	$5.09

(3)

Fixed overhead rate per unit increase with decrease in production and decreases with increase in production , thus estimated unit product cost fluctuates with change in units produced .

(4)

Fixed overhead cost for the year(182000*4)=		$728,000
Estimated units produced		300,000
fixed overhead cost per unit		$2.43
Variable overhead cost per unit		0.4
total manufacturing overhead cost per unit		$2.83
unit product cost
direct materials	2.00
Direct labor	0.67
Manufacturing overhead	2.83
unit product cost	5.5