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	$	200,000		$	100,000		$	50,000		$	150,000
Direct labor		80,000			40,000			20,000			60,000
Manufacturing overhead		220,000			196,000			184,000			?
Total manufacturing costs (a)	$	500,000		$	336,000		$	254,000		$	?
Number of units to be produced (b)		120,000			60,000			30,000			90,000
Estimated unit product cost (a) ÷ (b)	$	4.17		$	5.60		$	8.47		$	?

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? Answer: $172,000

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? Answer: $4.64

3. What is causing the estimated unit product cost to fluctuate from one quarter to the next? Answer:The fixed portion of hte manufacturing overhead cost is causing the unit porduct costs to flucuate.  

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. ***I need help on this one***

Answer 1

Solution:

Given data:

Quarter
	First			Second			Third			Fourth
Direct materials	$	200,000		$	100,000		$	50,000		$	150,000
Direct labor		80,000			40,000			20,000			60,000
Manufacturing overhead		220,000			196,000			184,000			?
Total manufacturing costs (a)	$	500,000		$	336,000		$	254,000		$	?
Number of units to be produced (b)		120,000			60,000			30,000			90,000
Estimated unit product cost (a) ÷ (b)	$	4.17		$	5.60		$	8.47		$	?

(1) :    Fixed can determined with manufacturing overhead detail of any quarter-

      Total Cost = Fixed cost + variable Cost

2,20,00 = Fixed cost + (1,20,00*0.40)

   2,20,000 = Fixed cost +48,000

Fixed cost = 2,20,000 – 48,000

Fixed cost   =1,72,000

(2) : estimation of unit product cost for the fourth quarter

(3):

The fixed portion of the MOH cost is causing the unit product costs to fluctuate.

The unit product cost increases as the level of production decreases because Fixed overhead is being spread over fewer units.

(4) :

Calculation of Predetermined Overhead rate:

Predetermined Overhead rate = Total manufacturing cost for the year / Total units

= 8,08,000 / 3,00,000

=2.69 per unit

Total manufacturing Cost for year :

                                             =(1,72,000*4)+(1,20,000+60,000+30,000+90,000*0.40)

=6,88,000 +(3,00,000*0.40)

=6,88,000+1,20,000

=8,08,000