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:

Quarter
First Second Third Fourth
Direct materials $200,000 $100,000 $50,000 $150,000
Direct labor 120,000 60,000 30,000 90,000
Manufacturing
overhead 220,000 196,000 184,000 ?
Total manufacturing
costs (a) $540,000 $356,000 $264,000 ?
Number of units to
be produced (b) 120,000 60,000 30,000 90,000
Estimated unit
product cost (a) ÷ (b) $4.50 $5.93 $8.80 ?
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.

Answer 1

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?

• $172,000

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?

• $4.98

3. What is causing the estimated unit product cost to fluctuate from one quarter to the next?

• The total number of units produced varies a lot, ranging from 120,000 units during the first quarter to only 30,000 units in the third quarter. Since most manufacturing overhead costs are fixed, total costs during the quarters with a low level of production will be too high.

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.

• $5.36

Step-by-step explanation:

Quarter First Second Third Fourth

Direct materials $200,000 $100,000 $50,000 $150,000

Direct labor 120,000 60,000 30,000 90,000

variable overhead 48,000 24,000 12,000 36,000

fixed overhead 172,000 172,000 172,000 172,000

Man. overhead 220,000 196,000 184,000 208,000

Total costs (a) $540,000 $356,000 $264,000 $448,000

Number of units 120,000 60,000 30,000 90,000

to be produced (b)

Estimated unit $4.50 $5.93 $8.80 $4.98

product cost (a) ÷ (b)

total fixed manufacturing overhead = $172,000 x 4 = $688,000 / total number of units produced = $688,000 / 300,000 units = $2.29333 per unit

so now the total variable overhead costs = $0.40 + $2.29333 = $2.69333 per unit

total costs per quarter:

Quarter First Second Third Fourth

Direct materials $200,000 $100,000 $50,000 $150,000

Direct labor 120,000 60,000 30,000 90,000

variable overhead 323,200 161,600 80,800 242,400

Total costs (a) $643,200 $321,600 $160,800 $482,400

Number of units 120,000 60,000 30,000 90,000

to be produced (b)

Estimated unit $5.36 $5.36 $5.36 $5.36

product cost (a) ÷ (b)