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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:
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 $240,000 $120,000 $60,000 $180,000
Direct labor $128,000 $64,000 $32,000 $96,000
Manufacturing overhead $300,000 $220,000 $180,000 ?
Total manufacturing costs $668,000 $404,000 $272,000 ?
Number of units to be produced 80,000 40,000 20,000 60,000
Estimated unit product cost $8.35 $10.10 $13.60 ?
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.
Assuming the estimated variable manufacturing overhead cost per unit is $2.00, what must be the estimated total fixed manufacturing overhead cost per quarter?
Final answer:By subtracting the quarter's total variable overhead from the total manufacturing overhead, we calculated that the estimated total fixed manufacturing overhead cost per quarter for Kingsport Containers Company is $140,000.Explanation:To determine the estimated total fixed manufacturing overhead cost per quarter for Kingsport Containers Company, we must first separate the variable overhead component from the total manufacturing overhead costs. The given variable overhead cost of $2.00 per unit can be multiplied by the number of units produced each quarter to obtain the total variable overhead for that quarter. Then, subtracting this from the total manufacturing overhead provides the fixed overhead. Remember, fixed costs do not change with production levels, so the fixed overhead will remain consistent across each quarter.Here is a step-by-step example for the first quarter:Calculate total variable overhead (Number of units × Variable cost per unit): 80,000 units × $2.00 = $160,000.Determine total fixed overhead (Total manufacturing overhead - Total variable overhead): $300,000 - $160,000 = $140,000.Following this method, the total fixed manufacturing overhead cost per quarter is $140,000....