Time period used to compute indirect cost rates. Splash Manufacturing produces outdoor wading and slide pools. 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, Sotco Wholesale, due to large fluctuations in price. The owner of Splash 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:
Pools manufactured and sold
It takes 0.5 direct manufacturing labor-hour to make each pool. The actual direct material cost is $7.50 per pool. The actual direct manufacturing labor rate is $16 per hour. The budgeted variable manufacturing overhead rate is $12 per direct manufacturing labor-hour. Budgeted fixed manufacturing overhead costs are $10,500 each quarter.
Pools manufactured and sold 700 500 150 150
1. Calculate the total manufacturing cost per unit for the second and third quarter assuming the companyallocates 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. Splash Manufacturing prices its pools at manufacturing cost plus 30%. Why might Sotco Wholesale be seeing large fluctuations in the prices of pools? Which of the methods described in requirements 1 and 2 would you recommend Splash use? Explain.