Management finds the variation in quarterly unit product costs to be confusing. 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.

Company A makes a single product that is subject to wide seasonal variations in demand. The company uses a job-order costing system and computes 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:

Quarters

First Second Third Fourth

Direct materials $240,000 $120,000 $60,000 $180,000

Direct labor 96,000 48,000 24,000 72,000

Manufacturing overhead 228,000 204,000 192,000 ?

Total manufacturing costs $564,000 $372,000 $276,000 ?

Number of units produced 80,000 40,000 20,000 60,000

Estimated unit product cost $7.05 $9.30 $13.80 ?

Answer:

Company A

1. Total fixed manufacturing overhead cost per quarter:

Quarters

First Second Third Fourth

Fixed manufacturing o/h $180,000 $180,000 $180,000 $180,000

2. Estimated unit product cost for the fourth quarter:

= Total manufacturing costs divided by estimated units produced

= $468,000/60,000 = $7/80

3. The fluctuation in the estimated unit product cost is caused by the fixed manufacturing overhead vis-a-vis the units produced. When more units are produced, the fixed manufacturing overhead per unit is less than when less units are produced.

4. Calculation of the unit product cost for all units produced during the year = total manufacturing costs divided by total units produced

= $1,680,000/200,000

= $8.40

Explanation:

Data and Calculations:

a) Estimated variable cost = $0.60

Quarters

First Second Third Fourth

Direct materials $240,000 $120,000 $60,000 $180,000

Direct labor 96,000 48,000 24,000 72,000

Manufacturing overhead 228,000 204,000 192,000 216,000

Total manufacturing costs $564,000 $372,000 $276,000 $468,000

Number of units produced 80,000 40,000 20,000 60,000

Estimated unit product cost $7.05 $9.30 $13.80 $7.80

b) Variable manufacturing overhead = $0.60 * units produced

Quarters

First Second Third Fourth

Number of units produced 80,000 40,000 20,000 60,000

Variable manufacturing

overhead (units * $0.60) $48,000 $24,000 $12,000 $36,000

c) Fixed manufacturing overhead = Total manufacturing overhead minus variable manufacturing overhead

Manufacturing overhead $228,000 $204,000 $192,000 $216,000

Variable overhead $48,000 $24,000 $12,000 $36,000

Fixed manufacturing o/h $180,000 $180,000 $180,000 $180,000

d) Total manufacturing costs per annum:

Total manufacturing costs $564,000 $372,000 $276,000 $468,000

= $1,680,000

Number of units produced 80,000 40,000 20,000 60,000

Total units produced = 200,000 units