Exercise 2-11 Varying Plantwide Predetermined Overhead Rates [LO2-1, LO2-2, LO2-3]

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 cost, by quarter

For the coming year are given below:

Exercise 2-11 Varying Plantwide Predetermined Overhead Rates [LO2-1, LO2-2, LO2-3]

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 cost, by quarter

For the coming year are given below:

QUARTER

First Second Third Fourth

Direct materials $240,000.00 $120,000.00 $60,000.00 $180,000.00

Direct labor $120,000.00 $60,000.00 $30,000.00 $90,000.00

Manufacturing overhead $230,000.00 $206,000.00 $194,000.00 ?

Total manufacturing costs (a) $590,000.00 $386,000.00 $284,000.00 ?

Number of units to be produced (b) $160,000.00 $80,000.00 $40,000.00 $120,000.00

Estimate unit product cost(a) (b) $3.69 $4.83 $7.10 $- ?

4. Assuming the company computes one predetermined overhead rate for the year rather that computing quarterly overhead rates, calculate the unit product cost for all units produced during the year.

The unit product cost can be stabilized by using a predetermined overhead rate that is based on expected activity for the entire year.

The cost formula created in requirement 1 can be adapted to compute the annual predetermined overhead rate.