Reference no: EM131663752

Question: 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:

                                                                      Quarter

                                                          1          2          3          4

Surfboards manufactured and sold           500       400       100       250

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.