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 120,000 60,000 30,000 90,000 Manufacturing overhead 240,000 216,000 204,000 ? Total manufacturing costs (a) $ 560,000 $ 376,000 $ 284,000 $ ? Number of units to be produced (b) 120,000 60,000 30,000 90,000 Estimated unit product cost (a) ÷ (b) $ 4.67 $ 6.27 $ 9.47 $ ? 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 $0.40, 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.
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
| Quarter | ||||
|---|---|---|---|---|
| First | Second | Third | Fourth | |
| Direct materials | $ 200,000 | $ 100,000 | $ 50,000 | $ 150,000 |
| Direct labor | 120,000 | 60,000 | 30,000 | 90,000 |
| Manufacturing overhead | 240,000 | 216,000 | 204,000 | ? |
| Total |
$ 560,000 | $ 376,000 | $ 284,000 | $ ? |
| Number of units to be produced (b) | 120,000 | 60,000 | 30,000 | 90,000 |
| Estimated unit product cost (a) ÷ (b) | $ 4.67 | $ 6.27 | $ 9.47 | $ ? |
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 $0.40, 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.
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