Kingsport Containers Company makes a single product that is subject to wide seas
ID: 2608460 • Letter: K
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
$
280,000
$
140,000
$
70,000
$
210,000
Direct labor
120,000
60,000
30,000
90,000
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:
1. Assuming the estimated variable manufacturing overhead cost per unit is $0.60, 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.
Quarter
First
Second
Third
Fourth
Direct materials
$
280,000
$
140,000
$
70,000
$
210,000
Direct labor
120,000
60,000
30,000
90,000
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
$
?
Explanation / Answer
Answer 1. Total Manufacturing Overhead - First Qtr. 230,000.00 Less: Variable MOH - $0.60 X 80,000 Units 48,000.00 Fixed Manufacturing Overhead per Qtr. 182,000.00 Answer 2. Fourth Qtr Direct Material 210,000.00 Direct Labor 90,000.00 Manufacturing Overhead 218,000.00 Total Manufacturing Costs 518,000.00 No. of Units Produced 60,000 Estimated Unit Product Costs 8.63 Manufacturing Overhead = $182,000 (Fixed MOH) + (60,000 Units X $0.60) (Variable MOH) Manufacturing Overhead = $218,000 Answer 3. Fixed manufacturing overhead is causing the unit product cost to fluctuate. The unit product cost increases when level of production decreases because fixed overhead is distributed over less units. Answer 4 Estimated Fixed Overhead - $182,000 X 4 728,000.00 Variable Overhead - 200,000 Units X $0.60 120,000.00 Total Overhead 848,000.00 Predetermined Overhead Rate = $848,000 (Total Overhead) / 200,000 Units Predetermined Overhead Rate = $4.24 per unit Quarter First Second Third Fourth Direct Materials 280,000.00 140,000.00 70,000.00 210,000.00 Direct Labor 120,000.00 60,000.00 30,000.00 90,000.00 Manufacturing Overhead 339,200.00 169,600.00 84,800.00 254,400.00 Total Manufacturing Overhead 739,200.00 369,600.00 184,800.00 554,400.00 No. of Units Produced 80,000 40,000 20,000 60,000 Estimated Unit Product Cost 9.24 9.24 9.24 9.24
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