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2. Jacarda Company makes a composting bin that is subject to wide seasonal variations in demand. Unit product costs are computed on a quarterly basis

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Jacarda Company makes a composting bin that is subject to wide seasonal variations in demand. Unit product costs are computed on a quarterly basis by dividing each quarters manufacturing costs (materials, labour, and overhead) by the quarters production in units. The companys estimated costs, by quarter, for the coming year are given below:

Quarter
First Second Third Fourth
Direct materials $ 554,400 $ 277,200 $ 138,600 $ 415,800
Direct labour 277,200 138,600 69,300 207,900
Manufacturing overhead 365,400 340,200 327,600 352,800
Total manufacturing costs $ 1,197,000 $ 756,000 $ 535,500 $ 976,500
Number of units to be produced 84,000 42,000 21,000 63,000
Estimated unit product cost $ 14.25 $ 18.00 $ 25.50 $ 15.50

Management finds the variation in unit product 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 companys overhead costs are mostly fixed and therefore show little sensitivity to changes in the level of production.

1

Calculate the predetermined overhead rate based on units and direct labour?

Recompute the companys unit product costs in accordance with your recommendations in (1) above.

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