Compute the unit product costs


Response to the following problem:

Kingsport Containers, Ltd, of the Bahamas experiences wide variation in demand for the 200-liter steel drums it fabricates. The leakproof, rustproof steel drums have a variety of uses from storing liquids and bulk materials to serving as makeshift musical instruments. The drums are made to order and are painted according to the customer's specifications-often in bright patterns and designs. The company is well known for the artwork that appears on its drums. Unit product costs are computed on a quarterly basis by dividing each quarter's manufacturing costs (materials, labor, and overhead) by the quarter's production in units. The company's estimated costs, by quarter, for the coming year follow:

 

 

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

260,000

Total manufacturing costs ...................

$668.000

$404,000

$272,000

$536,000

Number of units to be produced .....

80,000

40,000

20,000

60,000

Estimated unit product cost ............

$8.35

$10.10

$13.60

$8.93

Management finds the variation in unit costs confusing and difficult to work with. It has been suggested that the problem lies with manufacturing overhead because it is the largest element of cost. Accordingly, you have been asked to find a more appropriate way of assigning manufacturing overhead cost to units of product. After some analysis, you have determined that the company's overhead costs are mostly fixed and therefore show little sensitivity to changes in the level of production.

Required:

I. The company uses a job-order costing system. How would you recommend that manufacturing overhead cost be assigned to production? Be specific, and show computations.

2. Re-compute the company's unit product costs in accordance with your recommendations in (1)above.

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Cost Accounting: Compute the unit product costs
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