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:

First Quarter Second Quarter Third Quarter Fourth Quarter
Direct materials $320,000 $160,000 $80,000 $240,000
Direct labor 80,000 40,000 20,000 60,000
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:
a. Using the high-low method, estimate the fixed manufacturing overhead cost per quarter and the variable manufacturing overhead cost per unit.
b. Compute the total cost of manufacturing cost and unit product cost for the fourth quarter.
c. Estimate the total manufacturing overhead cost for the year and an annual predetermined overhead rate.

Answer 1

A. Variable manufacturing overhead cost per unit $0.6 per unit

Fixed manufacturing overhead per quarter $182,000

B.Manufacturing overhead $218,000

C. Total manufacturing overhead cost $848,000

Predetermined rate $4.24 per unit

Step-by-step explanation:

a. Calculation to estimate the fixed manufacturing overhead cost per quarter and the variable manufacturing overhead cost per unit.

Variable manufacturing overhead cost per unit= (230,000-194,000)/(80,000-20,000)

Variable manufacturing overhead cost per unit= $0.6 per unit

Fixed manufacturing overhead per quarter = 230,000 – (80,000*0.6)

Fixed manufacturing overhead per quarter = $182,000

B. Computation for the total cost of manufacturing cost and unit product cost for the fourth quarter

Manufacturing overhead = 182,000 + (60,000*.6).

Manufacturing overhead = $218,000

Now let calculate the Unit product cost

Unit product cost = $218,000/60,000 = $3.63

C. Calculation to Estimate the total manufacturing overhead cost for the year and an annual predetermined overhead rate

Total manufacturing overhead cost = 230,000+206,000+194,000+218,000 = $848,000

Predetermined rate = 848,000/200,000 = $4.24 per unit

(80,000+40,000 +20,000 +60,000=$200,000)