Question

Kettle Company produces two products (F56 and F57), applying manufacturing overhead on the basis of direct labor hours. Anticipated unit production costs (material, labor, and overhead) and manufacturing volumes are:
F56: 2,000 units, $234
F57: 3,500 units, $271
Kettle’s overhead arises because of various activities, one of which is purchase-order processing. Budgeted cost for this activity is expected to be $70,000. The firm believes that the number of purchase orders processed is a key cost driver and expects the following activity for its products: F56, 10 purchase orders; F57, 40 purchase orders. Kettle’s selling prices are based heavily on cost.

Required:
A. Activity-based costing (ABC) is said to result in improved costing accuracy when compared with traditional costing procedures. Briefly explain how this improved accuracy is attained.

B. Compute:
1. the pool rate for purchase-order processing.
2. the purchase-order processing cost to be charged to one unit of F56.

C. Assume that Kenyon switched to activity-based costing and calculated total unit production costs as follows: F56, $285; F57, $220.

1. Which of the two products, F56 or F57, was overcosted prior to the change to ABC? No explanation is necessary. Which cost item would be modified accordingly and in what direction?

2. Which of the two products, F56 or F57, may have been less competitive in the marketplace prior to the change to ABC? Briefly explain.

2. The following data from the just completed year are taken from the accounting records of Kenton Company

Sales		$975,000
Direct labor cost		$165,000
Raw material purchases		$229,000
Selling expenses		$48,750
Administrative expenses		$146,250
Manufacturing overhead applied to work in process		$180,000
Actual manufacturing overhead costs		$175,050
Inventories:	Beginning	Ending
Raw materials	$18,000	$17,500
Work in process	$20,000	$14,750
Finished goods	$9,000	$11,000

Required:

1. Prepare a schedule of cost of goods manufactured. Assume all raw materials used in production were direct materials.

2. Prepare a schedule of cost of goods sold. Assume that the company’s underapplied or overapplied overhead is closed to Cost of Goods Sold.

3. Prepare an income statement.

Answer 1