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		80,000			40,000			20,000			60,000
Manufacturing overhead		240,000			216,000			204,000			?
Total manufacturing costs (a)	$	520,000		$	356,000		$	274,000		$	?
Number of units to be produced (b)		120,000			60,000			30,000			90,000
Estimated unit product cost (a) ÷ (b)	$	4.33		$	5.93		$	9.13		$	?

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.

Complete this question by entering answers in the Required Tabs below.

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

	Fixed manufacturing overhead cost

Required 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? (Do not round the intermediate calculations and round the "Unit product cost" to 2 decimal places.)

	Unit product cost

Required 3

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

Which one of the four below?

	The fixed portion of the manufacturing overhead cost is causing the unit product costs to fluctuate. The unit product cost increases as the level of production decreases because the fixed overhead is spread over fewer units. The fixed portion of the manufacturing overhead cost is causing the unit product costs to fluctuate. The unit product cost decreases as the level of production decreases because the fixed overhead is spread over fewer units. The variable portion of the manufacturing overhead cost is causing the unit product costs to fluctuate. The unit product cost increases as the level of production decreases because the variable overhead is spread over fewer units. The variable portion of the manufacturing overhead cost is causing the unit product costs to fluctuate. The unit product cost decreases as the level of production decreases because the variable overhead is spread over fewer units.

Required 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. (Do not round the intermediate calculations and round the "Unit product cost" to 2 decimal places.

	Unit product cost

Answer 1

Solution 1 (Kingsport container company):
Fixed manufacturing overhead = Total manufacturing overhead - Variable manufacturing overhead
= $240,000 - (120000*$0.40) = $192,000

Solution 2:
Estimated unit product cost for 4th quarter = Total manufacturing costs / Nos of units produced
= ($150,000 + $60,000 + 90000*$0.40 + $192,000) / 90000 = $4.87 per unit

Solution 3:
The fixed portion of manufacturing overhead cost is causing the unit product cost to fluctuate. The unit product cost increases as the level of production decreases because the fixed overhead is spread over fewer units.
Hence first option is correct.

Solution 4:
Total manufacturing costs for the year = $520,000 + $356,000 + $274,000 + $438,000 = $1,588,000
Total units produced = 120000 + 60000 + 30000 + 90000 = 300000
Unit product cost = $1,588,000 / 300000 = $5.29 per unit