Question

In: Accounting

Kingsport Containers Company makes a single product that is subject to wide seasonal variations in demand....

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 160,000 80,000 40,000 120,000
Manufacturing overhead 240,000 216,000 204,000 ?
Total manufacturing costs (a) $ 720,000 $ 456,000 $ 324,000 $ ?
Number of units to be produced (b) 120,000 60,000 30,000 90,000
Estimated unit product cost (a) ÷ (b) $ 6.00 $ 7.60 $ 10.80 $ ?

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.

Solutions

Expert Solution

Particulars Q1 Q2 Q3 Q4
a) DM         3,20,000.00         1,60,000.00             80,000.00      2,40,000.00
b) DL         1,60,000.00             80,000.00             40,000.00      1,20,000.00
c) MOH         2,40,000.00         2,16,000.00         2,04,000.00      2,28,000.00          8,88,000.00
        7,20,000.00         4,56,000.00         3,24,000.00      5,88,000.00
d) UNITS         1,20,000.00             60,000.00             30,000.00          90,000.00          3,00,000.00
e) Cost per unit                        6.00                        7.60                     10.80                     6.53
f) Variable MOH (given) 0.4 0.4 0.4 0.4
g) Variable cost per quarter (d*f)             48,000.00             24,000.00             12,000.00          36,000.00
( VOH cost per unit * units produced during quarter)
h) Total Fixed MOH cost per quarter (c-g)         1,92,000.00         1,92,000.00         1,92,000.00      1,92,000.00
( Total manufac cost - variable manfacturing cost )
Ans 2 Fixed manufacturing cost is constant during first three quarters irrespective of the output.
Only the Direct material, labour & variable manufacturing cost are changing (in total) due to chnge in output.
All the three variable costs per unit are constant.
Cost for Q4 Total per unit (Total/90,000)
DM         2,40,000.00                        2.67
DL         1,20,000.00                        1.33
VMOH ( 90,000* 0.40)             36,000.00                        0.40
FMOH         1,92,000.00                        2.13
COST OF UNIT                            6.53
Ans 3 Q1 Q2 Q3 Q4
DM (DM per quarter cost/ output per quarter)                        2.67                        2.67                       2.67                     2.67
DL (DL per quarter cost/ output per quarter)                        1.33                        1.33                       1.33                     1.33
VMOH (VMOH per quarter cost/ output per quarter)                        0.40                        0.40                       0.40                     0.40
FMOH (FMOH per quarter cost/ output per quarter)                        1.60                        3.20                       6.40                     2.13
Per unit cost                       6.00                       7.60                    10.80                    6.53
Reason for change in estimated product cost per quarter is due to change in per unit fixed cost   
which is due to change in output produced during the quarter.
Fixed overheads in total doesnot vary due to change in output.
Ans 4 Pre determined Overhead rate Total Overheads/ units produced during year
Total OH               8,88,000                       2.96
Units produced during year               3,00,000
Unit cost
DM                        2.67
DL                        1.33
MOH                        2.96
Per unit cost                       6.96

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