in demand The company uses a joborder costing system and com

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 Direct labor Manufacturing overhead Total manufacturing costs (a) Number of units to be produced (b) 128,000 6,000 3, 90,000 230,088 286,e0e 194,e 630,000 $466,009 $294,808 3 120,000 68,00 30,000 98,80e ct cost (a)(b) 5.25% 6.77 $ 9.30 $ confusing and difficult to work with. It has been suggested that Management finds the variation in quarterly unit product costs to be the problem lies with manufacturing overhead because it is the largest element of total manufacturing cost. Accordingly. you have n asked to find a more appropriate way of assigning manufacturing overhead cost to units of product Required 1. Assuming the estimated varlable manufacturing overhead cost per unit is $0.40, what must be the estimated total fixed manufacturing overhead cost per quarter? 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

Answer

1.

Estimated Variable mfg. overhead = $0.4per unit

Estimated fixed Cost = Total Mfg. overhead – Estimated Variable mfg.overhead

Lets take First quarter example,

Manufacturing Overhead = $230,000

Units produced = 120,000

Variable Overhead = 120,000 Units * $0.4

Variable Overhead = $48,000

Fixed Overhead = Total Mfg. overhead –Variable mfg.overhead

= $230,000 – $48,000

Fixed Overhead = $182,000

2.

4h Quarter

Total Manufacturing Overhead = Variable Mfg. Overhead + Fixed Mfg. Overhead

= (90,000 Units * $0.4) + $182,000

Total Manufacturing Overhead = $218,000

Total Manufacturing Cost = Material Cost + Labor Cost + Total mfg. cost

= 210,000 + 90,000 + 218,000

Total Manufacturing Cost = $518,000

Unit Product Cost = Total Manufacturing Cost / No. of Units Produced

= $518,000 / 90,000 Units

Unit Product Cost = $5.75 per unit

3.

Option A

The fluctuation in unit product cost from one quarter to another is because of change in production as the more we produce, the more unit will share the fixed manufacture overhead and the total unit product cost will go down and Vice-versa.

4.

Unit cost = Total Manufacturing cost during year / No. of Units produced during the year

= $ (630,000 + 406,000 + 294,000 + 518,000) / (120,000 + 60,000 + 30,000 + 90,000) Units

= $1,848,000 / 300,000 Units

Unit cost = $6.16 per unit