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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: 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. Assuming the company computes one predetermined overhead rate for the year rather than computing quarterly overhead rates i calculate the unit product cost for all units produced during the year.
Expert Answer
Answer 1.
Variable Manufacturing Overhead per unit = $0.30
First Quarter:
Manufacturing Overhead = $240,000
Number of units produced = 160,000
Manufacturing Overhead = Variable Manufacturing Overhead per unit * Number of units produced + Fixed Manufacturing Overhead
$240,000 = $0.30 * 160,000 + Fixed Manufacturing Overhead
$240,000 = $48,000 + Fixed Manufacturing Overhead
Fixed Manufacturing Overhead = $192,000
So, Fixed Manufacturing Overhead per quarter is $192,000
Answer 2.
Quarter 4:
Number of units produced = 120,000
Fixed Manufacturing Overhead = $192,000
Variable Manufacturing Overhead per unit = $0.30
Manufacturing Overhead = $192,000 + 120,000*$0.30
Manufacturing Overhead = $228,000
Total Manufacturing Cost = Direct Materials + Direct Labor + Manufacturing Overhead
Total Manufacturing Cost = $150,000 + $90,000 + $228,000
Total Manufacturing Cost = $468,000
Unit Product Cost = Total Manufacturing Cost / Number of units produced
Unit Product Cost = $468,000 / 120,000
Unit Product Cost = $3.90
Answer 3.
Total Manufacturing Overhead for year = $240,000 + $216,000 + $204,000 + $228,000
Total Manufacturing Overhead for year = $888,000
Total Number of units produced for year = 160,000 + 80,000 + 40,000 + 120,000
Total Number of units produced for year = 400,000
Predetermined Overhead Rate = Total Manufacturing Overhead for year / Total Number of units produced for year
Predetermined Overhead Rate = $888,000 / 400,000
Predetermined Overhead Rate = $2.22
Total Manufacturing Cost for year = $560,000 + $376,000 + $284,000 + $468,000
Total Manufacturing Cost for year = $1,688,000
Total Number of units produced for year = 400,000
Unit Product Cost = Total Manufacturing Cost for year / Total Number of units produced for year
Unit Product Cost = $1,688,000 / 400,000
Unit Product Cost = $4.22
