Question

Exercise 5-12 Varying Predetermined Overhead Rates [LO3, LO5]

Jacarda Company makes a composting bin that is subject to wide seasonal variations in demand. Unit product costs are computed on a quarterly basis by dividing each quarter’s manufacturing costs (materials, labour, and overhead) by the quarter’s production in units. The company’s estimated costs, by quarter, for the coming year are given below:

	Quarter
	First			Second			Third			Fourth
Direct materials	$	183,600		$	91,800		$	45,900		$	137,700
Direct labour		91,800			45,900			22,950			68,850
Manufacturing overhead		137,700			107,100			91,800			122,400
Total manufacturing costs	$	413,100		$	244,800		$	160,650		$	328,950
Number of units to be produced		102,000			51,000			25,500			76,500
Estimated unit product cost	$	4.05		$	4.80		$	6.30		$	4.30

Management finds the variation in unit product costs to be confusing and difficult to work with. It has been suggested that the problem lies with manufacturing overhead, since it is the largest element of cost. Accordingly, you have been asked to find a more appropriate way of assigning manufacturing overhead cost to units of product. After some analysis, you have determined that the company’s overhead costs are mostly fixed and therefore show little sensitivity to changes in the level of production.

Required:

1. Calculate the predetermined overhead rate based on units and direct labour? (Round your "per unit" answer to 2 decimal places.)

Predetermined overhead rate-unit of product	1.80	per unit
Predetermined overhead rate-basis on direct labour cost	200	%

2. Recompute the company’s unit product costs in accordance with rate per unit in (1) above. (Round your answers to 2 decimal places.)

quarter 1 . quarter 2. quarter 3. quarter 4

estimated unit product cost ?    ? ? ?

Answer 1

	First	Second	Third	Fourth
Direct materials	$183,600.00	$91,800.00	$45,900.00	$137,700.00
Direct labour	$91,800.00	$45,900.00	$22,950.00	$68,850.00
Manufacturing overhead	$183,600.00	$91,800.00	$45,900.00	$137,700.00
	(102000*1.80)	(51000*1.80)	(25500*1.80)	(76500*1.80)
Total manufacturing costs (a)	$459,000.00	$229,500.00	$114,750.00	$344,250.00
Number of units to be produced (b)	102000	51000	25500	76500
Estimated unit product cost (a/b)	$4.50	$4.50	$4.50	$4.50