EXERCISE 5–12 Varying Predetermined Overhead Rates [LO3, LO5]

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 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 are given below:

 

 

 

Â	First	Second	Third	Fourth
Direct materials. . . . . . . . . . . . . . . . . . . . . . . . . . .	$240,000	$120,000	$ 60,000	$180,000
Direct labour . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	96,000	48,000	24,000	72,000
Manufacturing overhead . . . . . . . . . . . . . . . . . .	228,000	204,000	192,000	216,000
Total manufacturing costs. . . . . . . . . . . . . . . . .	$564,000	$372,000	$276,000	$468,000
Number of units to be produced. . . . . . . . . . .	80,000	40,000	20,000	60,000
Estimated unit product cost. . . . . . . . . . . . . .  .	$7.05	$9.30	$13.80	$7.80

 

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 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 manufac- turing overhead cost be assigned to production? Be specific, and show computations.

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