Exercise 211 Varying Plantwide Predetermined Overhead Rates

Exercise 2-11 Varying Plantwide Predetermined Overhead Rates [LO2-1, LO2-2, LO2-3] 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 $160,000 Third Fourth 80,000 $ 40,000 $120,000 160,000 80,000 40,000 120,000 Second Direct materials Direct labor Manufacturing overhead Total manufacturing costs (a) Number of units to be produced (b) Estimated unit product cost (a) (b) $3.50 $ 4.707.10 $ 240,000 216,000 204,000 000 $3-200 $284,000 $ 160,000 80,000 40,000 120,000 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 $0.30, 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.

Solution

1. Since the estimated variable product cost =$0.3 per unit

Thus,Total Variable Cost for the first quarter =$0.3×160000 units =$48000

Fixed cost for every quarter=$240000-$48000

=$192000

P.S. Answer is same if calculated by taking figures of second quarter

i.e Variable Cost =80000×0.3=$24000

Fixed cost = $216000-$24000=$192000

2. Fixed Manufacturing Overheads for the fourth quarter=$192000

variable Manufacturing Overhead=$0.3×120000 units= $36000

Total Manufacturing Overhead =$228000

Total Manufacturing Costs =$120000+$120000+$228000=$468000

Unit Product Cost =$468000/120000=$3.90 per unit

3.The unit product cost is fluctuating because of Fixed Manufacturing Overheads.Since fixed manufacturing overheads do not depend upon the units of goods manufactured and thus thereby causing unusual fluctuations in the unit product cost.

The breakeven no.of units can be calculated by the following formula =Fixed Cost/Contribution per unit

BREAKEVEN POINT IS A POINT WHERE THERE IS NO PROFIT OR NO LOSS

CONTRIBUTION= SALES- VARIABLE COST

Thus one can control the fluctuations in unit cost by manufacturing the optimum number of units considering break even point.

4. Total Direct Material Cost= $400000

Total Direct Labour Cost=$400000

Total units produced=400000 units

Total Variable Manufacturing Overhead=$0.3×400000= $120000

Total Fixed Manufacturing Overhead=$ 192000×4=$ 768000

Total Product Cost=$1688000

Unit Cost=$1688000/400000units=$4.22per unit

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