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 Third Fourth 40, 000 $120, 000 90, 000 Ir st becond $160, 000 80, 000 Direct materials Direct labor Manufacturing overhead Total manuf acturing costs (a) Number of units to be produced (b) Estimated unit product cost (a) (b) 120, 000 60, 000 30, 000 230, 000 206, 000 194, 000 $510, 000 $346, 000 $264, 000 30, 000 $4.25 $5.77 $ 8.80 120, 000 60, 000 90, 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 $0.40, 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

Solution

1. Estimated variable manufacturing overhead cost per unit is $0.40, then the estimated total fixed manufacturing overhead cost per quarter is:

Given data for producing 120,000 units:

For first quarter total manufacturing cost= $ 230,000

Variable expenses per unit= $ 0.40

Total variable cost =(120,000*0.40)= $48,000

So, total fixed cost=($230,000-$48,000) =$ 182,000

Given data for producing 60,000 units:

For second quarter total manufacturing cost= $ 206,000

Variable expenses per unit= $ 0.40

Total variable cost =(60,000*0.40)= $24,000

So, total fixed cost=($206,000-$24,000) =$ 182,000

Given data for producing 30,000 units:

For third quarter total manufacturing cost= $ 194,000

Variable expenses per unit= $ 0.40

Total variable cost =(30,000*0.40)= $12,000

So, total fixed cost=($194,000-$12,000) =$ 182,000

TOTAL FIXED MANUFACTURING OVERHEAD = $ 182,000

2. Estimated unit product cost for fourth quarter:

For producing 90,000 units:

Total variable cost =(90,000*0.40) = $ 36,000

Total fixed cost= $182,000

Total manufacturing cost ($36,000+$182,000)=$218,000

Total manufacturing cost(120,000+90,000+218,000) =$428,000

Estimated unit product cost=(428,000/90,000)= $ 4.76

3. Causing the estimated unit product cost to fluctuate from one quarter to the next:

First quarter production is 120,000units with per unit cost of $ 4.26

Second quarter production is 60,000units with per unit cost of $ 5.77

Third quarter production is 30,000units with per unit cost of $ 8.80

Fourth quarter production is 90,000units with per unit cost of $ 4.76

From the above obsevation, the per unit production cost is increasing, when ever the total units production is decreasing. The reason is fixed manufacturing overhead cost may not be changed based on changes in production.

4. Unit product cost for all units produced during the year:

Total units production of all the 4 quarter is =

Direct material= $ 400,000

Direct labour= $ 300,000

*Manufacturing overhead= $ 302,000

Total manufacturing cost= $ 1002,000

Estimated unit product cost=(1002,000/300,000)= $ 3.34

*Note:

Total variable manufacturing overhead (300,000*0.40) = $120,000

Total fixed manufacturing overhead                               = $ 182,000

Total manufactuiring cost = ($120,000+$182,000)         =$ 302,000