Question

Manning Company produces 3 products and uses the job order method to determine unit costs. Manning uses direct labor hours as a base to allocate overhead. The following beginning of the year estimates are known:

Total manufacturing overhead                $1,100,000
Total units produced (all 3 products)           100,000
Total direct labor hours                             100,000
Total direct labor cost                            $1,120,000
Total direct material cost                        $2,000,000
Total machine hours                                    50,000


The following end of the year results are also known:

                                                Product1           Product2           Product3                     Total
Direct labor hours                          50,000              30,000              35,000               115,000
Direct labor costs                      $600,000           $200,000           $400,000           $1,200,000
Direct materials costs                $700,000           $800,000           $600,000           $2,100,000
Manufacturing overhead                                                                                                $1,050,000
Total units produced                      41,000              29,000              35,000               105,000
Machine hours                               13,000              22,000              13,000                 48,000

1.         Calculate the cost per unit of each product.







2.         At this stage, is manufacturing overhead under or over applied (and by how much)?





3.         If all three products sell at a market determined price of $55, what strategy would            you recommend?

Answer 1

Solution:

Estimated manufacturing overhead = $1,100,000

Estimated direct labor hour = 100000

Predetermined overhead rate = Estimated manufacturing overhead / Estimated direct labor hours

= $1,100,000 / 100000 = $11 per hour

Computation of Unit Product Cost
Particulars	Product 1	Product 2	Product 3	Total
Variable Cost:
Direct Material Cost	$700,000.00	$800,000.00	$600,000.00	$2,100,000.00
Direct Labor Cost	$600,000.00	$200,000.00	$400,000.00	$1,200,000.00
Total Variable Cost	$1,300,000.00	$1,000,000.00	$1,000,000.00	$3,300,000.00
Direct Labor hours	50000	30000	35000	115000
Manufacturing overhead applied (Direct labor hours * $11)	$550,000.00	$330,000.00	$385,000.00	$1,265,000.00
Total Product Cost (Variable cost + Fixed Overhead)	$1,850,000.00	$1,330,000.00	$1,385,000.00	$4,565,000.00
Nos of unit produced	41000	29000	35000
Unit Product cost (Total Product Cost / Nos of unit produced)	$45.12	$45.86	$39.57
Variable cost per unit (Variable cost / nos of unit produced)	$31.71	$34.48	$28.57

Solution 2:

Total actual fixed manufacturing overhead = $1,050,000

Applied fixed manufacturing overhead = $1,265,000

Overapplied fixed manufacturing overhead = $1,265,000 - $1,050,000 = $215,000

Therefore fixed manufacturing overhead are overapplied by $215,000

Solution 3:

If all product sell at a market determined price of $55, then the product which gives highest contribution per unit will be produced and sold in higher quantity if we have constraint resources in terms of direct labor hours, machine hours material etc.

Therefore product which have lowest unit variable cost will given higher contribution per unit. Therefore Product 3 is having lowest variable cost per unit of $28.57, therefore resources will be allocated to product 3 first, thereafter resources will be allocated to Product 1 having variable cost of $31.71 and thereafter resources will be allocated to Product 2 having highest variable cost per unit i.e. $34.48