Chapter 6 Homework 1 . 1. award: 0.66 out of 0.66 points Diego Company manufactures one product that is sold for $80 per unit in two geographic regions—the East and West regions. The following information pertains to the company’s first year of operations in which it produced 40,000 units and sold 35,000 units. Variable costs per unit: Manufacturing: Direct materials $ 24 Direct labor $ 14 Variable manufacturing overhead $ 2 Variable selling and administrative $ 4 Fixed costs per year: Fixed manufacturing overhead $ 800,000 Fixed selling and administrative expenses $ 496,000 The company sold 25,000 units in the East region and 10,000 units in the West region. It determined that $250,000 of its fixed selling and administrative expenses is traceable to the West region, $150,000 is traceable to the East region, and the remaining $96,000 is a common fixed cost. The company will continue to incur the total amount of its fixed manufacturing overhead costs as long as it continues to produce any amount of its only product. Required: What is the unit product cost under variable costing?
Exercise 3-14 Varying Predetermined Overhead Rates (LO1, LO2, LO3) Javadi Company makes a single product that is subject to wide seasonal variations in demand. The company uses a job-order costing system and computes predetermined overhead rates on a quarterly basis using the number of units to be produced as the allocation base. Its estimated costs, by quarter, for the coming year are given below: Quarter First Second Third Fourth Direct materials $240,000 $120,000 $60,000 $180,000 Direct labor 96,000 48,000 24,000 72,000 Manufacturing Overhead 228,000 204,000 192,000 ? Total manufacturing costs (a) $564,000 $372,000 $276,000 ? Number of units to be produced (b) 80,000 40,000 20,000 60,000 Estimated unit product cost (a)/(b) $7.05 $9.30 $13.80 ? Management finds the variation in quarterly unit product costs to be confusing and difficult to work with. It has been suggested that the problem lies with manufacturing overhead because it is the largest element of total manufacturing cost. Accordingly, you have been asked to find a more appropriate way of assigning manufacturing overhead cost to units of product. Required: 1 Using the high-low method, estimate the fixed manufacturing overhead cost per quarter and the variable manufacturing overhead cost per unit. Create a cost formula to estimate the total manufacturing overhead cost for the fourth quarter. Compute the total manufacturing costs and unit product cost for the fourth quarter. Units Overhead High Activity 80,000 $228,000 Low Activity 20,000 192,000 Change 60,000 $36,000 Variable cost Change in cost ÷ Change in activity = $36,000 ÷ 60,000 units = $0.60 per unit produced Total cost (First quarter) 228,000.00 Variable cost element ($0.60 per unit × 80,000 units) 48,000.00 Fixed cost element 180,000.00 These fixed and variable cost estimates can be used to estimate the total manufacturing overhead cost for the fourth quarter as follows: Y = $180,000 + ($0.60 per unit)(60,000 units) Estimated fixed manufacturing overhead 180,000.00 Estimated variable manufacturing overhead $0.60 per unit × 60,000 units 36,000.00 Estimated total manufacturing overhead cost 216,000.00 Total manufacturing cost and unit product cost: Direct materials $180,000.00 Direct labor 72,000.00 Manufacturing overhead 216,000.00 Total manufacturing costs $468,000.00 ÷ Number of units to be produced 60,000.00 Unit product cost $7.80 2 What is causing the estimated unit product cost to fluctuate from one quarter to the next? 3 How would you recommend stabilizing the company's unit product cost? Support your answer with computations that adapt the cost formula in requirement 1. Y = $720,000 + $0.60 per unit × 200,000 units Estimated fixed manufacturing overhead 720,000.00 Estimated variable manufacturing overhead 120,000.00 $0.60 per unit × 200,000 units 840,000.00 Estimated total manufacturing overhead cost The annual predetermined overhead rate is computed as follows: Estimated total manufacturing overhead 840,000.00