Kingsport Containers, Ltd. of the Bahamas 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 customers specificationsoften 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 quarters manufacturing costs (materials, labour, and overhead) by the quarters production in units. The companys estimated costs, by quarter, for the coming year are as follows:

Quarter

First Second Third Fourth

Direct materials $260,000 $130,000 $ 65,000 $195,000

Direct labour 200,000 100,000 50,000 150,000

Manufacturing overhead 320,000 240,000 190,000 290,000

Total manufacturing costs $780,000 470,000 $305,000 $635,000

Number of units to be produced 80,000 40,000 20,000 60,000

Estimated cost per unit $ 9.75 $ 11.75 $ 15.25 $ 10.58Page 127

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 companys overhead costs are mostly fixed and therefore show little sensitivity to changes in the level of production.

Required:

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

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