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		120,000			60,000			30,000			90,000
Manufacturing overhead		230,000			206,000			194,000			?
Total manufacturing costs (a)	$	670,000		$	426,000		$	304,000		$	?
Number of units to be produced (b)		80,000			40,000			20,000			60,000
Estimated unit product cost (a) ÷ (b)	$	8.38		$	10.65		$	15.20		$	?

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.

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?

Requirement 1:
	Fixed manufacturing overhead cost

Required 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? (Do not round the intermediate calculations and round the "Unit product cost" to 2 decimal places.)

	Unit product cost

Required 3:

What is causing the estimated unit product cost to fluctuate from one quarter to the next?

The fixed portion of the manufacturing overhead cost is causing the unit product costs to fluctuate. The unit product cost increases as the level of production decreases because the fixed overhead is spread over fewer units.radio button unchecked1 of 4 The fixed portion of the manufacturing overhead cost is causing the unit product costs to fluctuate. The unit product cost decreases as the level of production decreases because the fixed overhead is spread over fewer units.radio button unchecked2 of 4 The variable portion of the manufacturing overhead cost is causing the unit product costs to fluctuate. The unit product cost increases as the level of production decreases because the variable overhead is spread over fewer units.radio button unchecked3 of 4 The variable portion of the manufacturing overhead cost is causing the unit product costs to fluctuate. The unit product cost decreases as the level of production decreases because the variable overhead is spread over fewer units.radio button unchecked4 of 4

Required 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. (Do not round the intermediate calculations and round the "Unit product cost" to 2 decimal places.)

	Unit product cost

Answer 1

1)								Manufacturing
								Dollars	Units
	High Values							$230,000	80,000			$230,000
	Low Values							194,000	20,000		Minus variable MOH	48,000
	Change in Costs							$36,000	60,000		Fixed MOH	$182,000
	Variable MOH cost per unit									$0.60
	Fixed MOH cost per quarter							$182,000	$182,000
	Answer)	$182,000
2)								Fourth
	Direct Materials							$240,000
	Direct Labor							90,000
	Manufacturing Overhead							218,000
		Total Manufacturing Costs						$548,000
	units produced							60,000
	Estimated unit product cost							$9.13
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							200000
	fixed overhead cost per unit							$3.64
	Variable overhead cost per unit							0.6
	total manufacturing cost per unit							$4.24
	unit product cost
	direct materials						4
	Direct labor						1.5
	Manufacturing overhead						4.24
	unit product cost						9.74