Kingsport Containers Company makes a single product that is

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

$

280,000

$

140,000

$

70,000

$

210,000

Direct labor

120,000

60,000

30,000

90,000

Manufacturing overhead

230,000

206,000

194,000

?

Total manufacturing costs (a)

$

630,000

$

406,000

$

294,000

$

?

Number of units to be produced (b)

80,000

40,000

20,000

60,000

Estimated unit product cost (a) ÷ (b)

$

7.88

$

10.15

$

14.70

$

?

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.

	Quarter
	First		Second		Third		Fourth
Direct materials	$	280,000		$	140,000		$	70,000		$	210,000
Direct labor		120,000			60,000			30,000			90,000
Manufacturing overhead		230,000			206,000			194,000			?
Total manufacturing costs (a)	$	630,000		$	406,000		$	294,000		$	?
Number of units to be produced (b)		80,000			40,000			20,000			60,000
Estimated unit product cost (a) ÷ (b)	$	7.88		$	10.15		$	14.70		$	?

Solution

Answer 1. Total Manufacturing Overhead - First Qtr.           230,000.00 Less: Variable MOH - $0.60 X 80,000 Units             48,000.00 Fixed Manufacturing Overhead per Qtr.           182,000.00 Answer 2. Fourth Qtr Direct Material           210,000.00 Direct Labor             90,000.00 Manufacturing Overhead           218,000.00 Total Manufacturing Costs           518,000.00 No. of Units Produced                   60,000 Estimated Unit Product Costs                        8.63 Manufacturing Overhead = $182,000 (Fixed MOH) + (60,000 Units X $0.60) (Variable MOH) Manufacturing Overhead = $218,000 Answer 3. Fixed manufacturing overhead is causing the unit product cost to fluctuate. The unit product cost increases when level of production decreases because fixed overhead is distributed over less units. Answer 4 Estimated Fixed Overhead - $182,000 X 4           728,000.00 Variable Overhead - 200,000 Units X $0.60           120,000.00 Total Overhead           848,000.00 Predetermined Overhead Rate = $848,000 (Total Overhead) / 200,000 Units Predetermined Overhead Rate = $4.24 per unit Quarter First Second Third Fourth Direct Materials           280,000.00     140,000.00        70,000.00     210,000.00 Direct Labor           120,000.00        60,000.00        30,000.00       90,000.00 Manufacturing Overhead           339,200.00     169,600.00        84,800.00     254,400.00 Total Manufacturing Overhead           739,200.00     369,600.00      184,800.00     554,400.00 No. of Units Produced                   80,000              40,000              20,000             60,000 Estimated Unit Product Cost                        9.24                  9.24                   9.24                  9.24