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	$	320,000		$	160,000		$	80,000		$	240,000
Direct labor		80,000			40,000			20,000			60,000
Manufacturing overhead		220,000			196,000			184,000			?
Total manufacturing costs (a)	$	620,000		$	396,000		$	284,000		$	?
Number of units to be produced (b)		160,000			80,000			40,000			120,000
Estimated unit product cost (a) ÷ (b)	$	3.88		$	4.95		$	7.10		$	?

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 $0.30, 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

Answer 1

	Quarter
	First	Second	Third	Fourth
Units Produced	1,60,000	80,000	40,000	1,20,000
Total Mfg. Overhead	2,20,000	1,96,000	1,84,000	2,08,000
Variable Mfg. Overhead	48,000	24,000	12,000	36,000
Fixed Mfg. Overhead	1,72,000	1,72,000	1,72,000	1,72,000

Answer 2

Unit Product Cost for 4th Quarter:

Direct Material	2,40,000
Direct Labour	60,000
Variable Mfg. Overhead	36,000
Fixed Mfg. Overhead	1,72,000
Total Mfg. Cost	5,08,000
Number of units Produced	1,20,000
Unit product cost	4.23

Answer 3

Since the buinsess of Kingsport Containers Company is subject to wide seasonal variation in demand, there is huge fluctuation in units produced every quarter.

Further, the company incurs sizeable amount of Fixed Cost, that is apportioned equally among each quarter.

The combination of the above two factors lead to fluctuation in estimated unit product cost from one quarter to other.

As far as variable cost is concerned (Direct Material and Direct Labour), there is no change in the per unit cost in all the four quarters.

Answer 4

Variable Mfg. Overhead Rate	0.3
Fixed Mfg. Overhead	1.72
[688,000 / 400,000 units]
Total Overhead Rate	2.02

	Quarter
	First	Second	Third	Fourth
Direct Material	3,20,000	1,60,000	80,000	2,40,000
Direct Labour	80,000	40,000	20,000	60,000
Variable Mfg. Overhead	48,000	24,000	12,000	36,000
Fixed Mfg. Overhead @ 1.72 per unit	2,75,200	1,37,600	68,800	2,06,400
Total manufacturing costs	7,23,200	3,61,600	1,80,800	5,42,400
Number of units to be produced	1,60,000	80,000	40,000	1,20,000
Estimated unit product Cost	4.52	4.52	4.52	4.52