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Varying Pre-Determined Overhead Rates

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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, as in show computations.

2. Recompute the company's unit product costs in accordance with your recommendations in (1) above.

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Solution Summary

This solution proposes how the manufacturing overhead cost be assigned to production, and computes the company's unit product costs in accordance with the job-order costing system.

Solution provided by:
Gaurav Agarwal, MS
Education
  • BE, Bangalore University, India
  • MS, University of Wisconsin-Madison
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