Varying Predetermined Overhead Rates:
|
|
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 |
Big Wheel, Inc. experiences a wide variation in demand for the 300-liter steel drums it fabricates.
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. Above is the company's estimated costs, by quarter, for the coming year. Management finds the variation in units costs to be confusing and difficult to work with, it has been suggested that the problem lies with manufacturing overhead, since it is the largest element of cost. It has been determined that the company's overhead costs are mostly fixed and therefore show little sensitivity to changes in the level of production.
Required:
1. The company uses a job-order costing system. How would you recommend that manufacturing overhead cost be assigned to production? Be specific, asn show computations.
2. Recompute the company's unit product costs in accordance with your recommendations in (1) above.