91Ó°ÊÓ

Time period used to compute indirect cost rates. Capitola Manufacturing produces surfboards. The company uses a normal-costing system and allocates manufacturing overhead on the basis of direct manufacturing labor-hours. Most of the company's production and sales occur in the first and second quarters of the year. The company is in danger of losing one of its larger customers, Pacific Wholesale, due to large fluctuations in price. The owner of Capitola has requested an analysis of the manufacturing cost per unit in the second and third quarters. You have been provided the following budgeted information for the coming year: $$\begin{array}{ccccc} & \multicolumn{4}{c} {\text { Quarter }} \\ \\)\cline { 2 - 5 } & 1 & 2 & 3 & 4 \\ \hline\\( \text { Surfboards manufactured and sold } & 500 & 400 & 100 & 250 \end{array}$$ It takes 2 direct manufacturing labor-hours to make each board. The actual direct material cost is \(\$ 65.00\) per board. The actual direct manufacturing labor rate is \(\$ 20\) per hour. The budgeted variable manufacturing overhead rate is \(\$ 16\) per direct manufacturing labor-hour. Budgeted fixed manufacturing overhead costs are \(\$ 20,000\) each quarter. 1\. Calculate the total manufacturing cost per unit for the second and third quarter assuming the company allocates manufacturing overhead costs based on the budgeted manufacturing overhead rate determined for each quarter. 2\. Calculate the total manufacturing cost per unit for the second and third quarter assuming the company allocates manufacturing overhead costs based on an annual budgeted manufacturing overhead rate. 3\. Capitola Manufacturing prices its surfboards at manufacturing cost plus \(20 \%\). Why might Pacific Wholesale be seeing large fluctuations in the prices of boards? Which of the methods described in requirements 1 and 2 would you recommend Capitola use? Explain.

Step by step solution

01

Calculate Budgeted Overhead Rate for Each Quarter

Calculate the budgeted overhead rate for each quarter based on the variable overhead rate and fixed overhead costs. Quarterly Budgeted Overhead Rate = (Fixed Manufacturing Overhead Costs + (variable manufacturing overhead rate * total direct labor hours)) / total direct labor hours

02

Calculate Total Manufacturing Cost Per Unit for the Second and Third Quarter Using Budgeted Overhead Rate per Quarter

Calculate the total manufacturing cost per unit for the second and third quarter assuming the company allocates manufacturing overhead costs based on the budgeted manufacturing overhead rate determined for each quarter. Total manufacturing cost per unit = Direct material cost per unit + Direct labor cost per unit + (Budgeted overhead rate for the quarter * Direct labor-hours per unit) Repeat this step for both the second and third quarters.

03

Calculate Annual Budgeted Overhead Rate

Calculate the annual budgeted overhead rate using the formula: Annual Budgeted Overhead Rate = (Total Fixed Manufacturing Overhead Costs + (variable manufacturing overhead rate * total direct labor hours for the year)) / total direct labor hours for the year

04

Calculate Total Manufacturing Cost Per Unit for the Second and Third Quarter Using Annual Budgeted Overhead Rate

Calculate the total manufacturing cost per unit for the second and third quarter assuming the company allocates manufacturing overhead costs based on an annual budgeted manufacturing overhead rate. Total manufacturing cost per unit = Direct material cost per unit + Direct labor cost per unit + (Annual Budgeted Overhead Rate * Direct labor-hours per unit) Repeat this step for both the second and third quarters.

05

Analyze the Price Fluctuation and Recommend a Method

Determine the possible reasons for large price fluctuations in the boards' prices and recommend which method (quarterly or annual budgeted overhead rate) should Capitola Manufacturing use to allocate manufacturing overhead costs. Consider which method results in a more stable and consistent price for the surfboards.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Overhead Rate Calculation

Understanding how to calculate the overhead rate is essential for businesses like Capitola Manufacturing to properly estimate the costs of production. This rate is essential to determine the total cost and subsequently set the price of products such as surfboards.

An overhead rate is computed to allocate indirect costs, like manufacturing overhead, to each unit produced. For Capitola Manufacturing, which uses normal costing, overhead costs are allocated based on direct labor hours. The formula to calculate the overhead rate for a given period is as follows:
\[\begin{equation}Overhead Rate = \frac{Fixed Overhead + (Variable Overhead Rate \times Total Direct Labor Hours)}{Total Direct Labor Hours}\end{equation}\]

Budgeted vs. Actual Overhead

It's critical to differentiate between budgeted and actual overhead rates. Budgeted rates are based on projected figures, which can lead to over- or under-allocation of costs if actual figures significantly differ. Conversely, using actual rates ensures precise cost allocation as it reflects the real expenses incurred.

For Capitola Manufacturing, calculating the overhead rate both quarterly and annually can reveal how cost allocation affects surfboard prices. A quarterly calculation provides season-specific rates, while an annual calculation spreads the overhead costs evenly throughout the year, potentially reducing price fluctuations.

Implications for Capitola Manufacturing

For the second and third quarters, the calculations would change depending on the chosen time-frame for computing indirect costs. For a business fearing customer loss due to price instability, selecting an appropriate overhead rate calculation method can be crucial for setting consistent pricing policies.

Manufacturing Cost Per Unit

Calculating the manufacturing cost per unit is a cornerstone in cost accounting and critical for Capitola Manufacturing's pricing strategy. This figure represents the total expense incurred to produce a single unit, comprising direct materials, direct labor, and allocated overhead costs.

To determine this cost, add the direct material and labor costs for each surfboard to the allocated overhead (based on the overhead rate calculation). Use this formula:\[\begin{equation}Total Manufacturing Cost Per Unit = Direct Material Cost + Direct Labor Cost + (Overhead Rate \times Direct Labor Hours Per Unit)\end{equation}\]

This method enables Capitola to estimate the manufacturing cost per surfboard for different time periods. By examining the second and third quarters specifically, the cost per unit may vary due to seasonal changes in production volume and overhead costs.

Seasonality and Production Volume

With most sales occurring in the first and second quarters, the production volume's impact on costs must be considered. Lower production volumes can inflate the cost per unit because the fixed overhead is spread over fewer units, reflecting an important aspect of cost behavior in manufacturing.

Cost Allocation Methods

Cost allocation is the process of distributing indirect costs across different departments, products, or production processes. In manufacturing, it's particularly important, as indirect costs like utilities, rent, and salaries can't be directly traced to a single product.

There are several methods to allocate these overhead costs:

• Direct Labor Hours: Uses the number of labor hours to allocate overhead, as Capitola Manufacturing does.
• Machine Hours: Allocates costs based on the hours machines are run.
• Activity-Based Costing (ABC): Allocates overhead to products based on activities that drive costs, such as setting up machinery.
• Standard Costing: Assigns predetermined costs to products and adjusts the differences at year-end.

In the case of Capitola Manufacturing, the decision between using quarterly or annual budgeted rates to allocate costs can have significant implications. An annual rate smooths out seasonal abnormalities and provides a more stable price throughout the year, which might appeal to Pacific Wholesale. However, this can also lead to under- or over-recovery of costs during specific quarters.

The chosen cost allocation method directly influences pricing strategies and the financial stability of a business like Capitola. Understanding and selecting the appropriate method is instrumental to both financial reporting and managerial decisions.