Q1) Javadi Company produces a composting bin which is subject to wide seasonal variations in demand. Unit product costs are calculated on quarterly basis by dividing each quarter's manufacturing costs (materials, labor, and overhead) by quarter's production in units. Company's estimated costs, by quarter, for coming year are listed 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 |
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 determines variation in unit product costs to be confusing and difficult to work with. It has been suggested that problem lies with manufacturing overhead, as it is largest element of cost. Accordingly, you have been asked to determine a more suitable way of assigning manufacturing overhead cost to units of product. After some analysis, you have find out that company's overhead costs are mostly fixed and hence illustrate little sensitivity to changes in level of production.
Question:
Company uses job-order costing system. How would you suggest that manufacturing overhead cost be allocated to production? Be specific, and show calculations.