E5–1 Time allowed: 20 minutes Kingsport Containers Ltd of Dublin experiences wide variation in demand for the 200-litre 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 costs are computed on a quarterly basis by dividing each quarter’s manufacturing costs (materials, labour and overhead)

by the quarter’s production in units. The company’s estimated costs, by quarter, for the coming year follow:

Management finds the variation in unit 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. 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 1 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 Recompute the company’s unit costs in accordance with your recommendations in Question 1 above.

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Quarter First Second Third Fourth Direct materials 240,000 120,000 60,000 180,000 Direct labour 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 cost per unit 8.35 10.10 13.60 8.93