Exercise 2-11 Varying Plantwide Predetermined Overhead Rates [LO2-1, LO2-2, LO2-

Question

Exercise 2-11 Varying Plantwide Predetermined Overhead Rates [LO2-1, LO2-2, LO2-3] 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 Third Fourth $200,000 $100,000 $ 50,000 $150,000 Second Direct materials Direct labor 120,000 60,000 30,000 90, 000 Manufacturing overhead Total manufacturing costs (a) Number of units to be produced (b) Estimated unit product cost (a) (b)$4.58$6.10 9.13 $ 230,000 206,000 194, 000 $550,000 $366,000 $274,000 $ 120,000 60,000 30,000 90,000 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 your answers in the tabs below Required 1Required 2 Required 3Required 4 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 1 Required 2 >

Explanation / Answer

1) Calculation of fixed manufacturing overhead per quarter manufacturing overhead-variable manufacturing overhead fixed manufacturing overhead= 230000-(120000*0.40)                                         = 230000-48000 fixed manufacturing overhead= $182000 2) calculation of estimated unit product cost for the 4th quarter calculation of manufacturing overhead fixed overhead for the quarter+variableoverhead for the quarter $182000+(90000*0.40) manufacturing overhead = $218000 total manufacturing cost and unit product cost Direct materials 150000 direct labour 90000 manufacturing overhead (a) 218000 number of unit to be produced (b) 90000 estimated unit product cost (a)/(b) 2.42 3) Fixed portion of the manufacturing overhead cost is unit product cost to fluctuate, the unit product cost increase as the level of production decrease 4) calculation of predetermined overhead rate predetermined overhead rate = total manufacturing cost for the year/ total units predetermined overhead rate = 848000/300000= 2.83 particulars 1st quarter 2nd quarter 3rd quarter 4th quarter total Direct material 200000 100000 50000 150000 500000 direct labour 120000 60000 30000 90000 300000 manufacturing overhead 230000 206000 194000 218000 848000 total manufacturing cost (1) 550000 366000 274000 458000 1648000 no of unit to be produced (2) 120000 60000 30000 90000 300000 estimated unit product cost (1)/(2) 4.58 6.1 9.13 5.09 5.49

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