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 customer’s specifications—often 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 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 as follows:
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 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 the manufacturing overhead cost be assigned to production? Be specific, and show computations.
2. Recompute the company’s unit costs in accordance with your recommendations in part (1).
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