Question

Shaker Stairs Co. designs and builds factory-made premium wooden stairways for homes. The manufactured stairway components (spindles, risers, hangers, hand rails) permit installation of stairways of varying lengths and widths. All are of white oak wood. Budgeted manufacturing overhead costs for the year 2017 are as follows.

Overhead Cost Pools		Amount
Purchasing		$73,800
Handling materials		82,080
Production (cutting, milling, finishing)		211,000
Setting up machines		96,250
Inspecting		96,000
Inventory control (raw materials and finished goods)		127,680
Utilities		270,000
Total budgeted overhead costs		$956,810

For the last 4 years, Shaker Stairs Co. has been charging overhead to products on the basis of machine hours. For the year 2017, 100,000 machine hours are budgeted.

Jeremy Nolan, owner-manager of Shaker Stairs Co., recently directed his accountant, Bill Seagren, to implement the activity-based costing system that he has repeatedly proposed. At Jeremy Nolan’s request, Bill and the production foreman identify the following cost drivers and their usage for the previously budgeted overhead cost pools.

Activity Cost Pools		Cost Drivers		Expected Use of Cost Drivers
Purchasing		Number of orders		600
Handling materials		Number of moves		8,000
Production (cutting, milling, finishing)		Direct labor hours		100,000
Setting up machines		Number of setups		1,250
Inspecting		Number of inspections		6,000
Inventory control (raw materials and finished goods)		Number of components		168,000
Utilities		Square feet occupied		90,000

Steve Hannon, sales manager, has received an order for 250 stairways from Community Builders, Inc., a large housing development contractor. At Steve’s request, Bill prepares cost estimates for producing components for 250 stairways so Steve can submit a contract price per stairway to Community Builders. He accumulates the following data for the production of 250 stairways.

Direct materials		$103,700
Direct labor		$112,100
Machine hours		14,600
Direct labor hours		5,100
Number of purchase orders		60
Number of material moves		800
Number of machine setups		100
Number of inspections		450
Number of components		16,000
Number of square feet occupied		8,000

Compute the predetermined overhead rate using traditional costing with machine hours as the basis. (Round answer to 2 decimal places, e.g. 12.25.)

Predetermined overhead rate

$

per machine hour

What is the manufacturing cost per stairway under traditional costing? (Round answer to 2 decimal places, e.g. 12.25.)

Cost per stairway

$

Calculate activity-based overhead rate for each activity. (Round answers to 2 decimal places, e.g. 12.25.)

Activity		Overhead Rate
Purchasing		$	per order
Handling materials		$	per move
Production		$	per D/L hour
Setting up machines		$	per setup
Inspecting		$	per inspection
Inventory control		$	per component
Utilities		$	per sq. ft.

Caluclate total overhead assigned under ABC.

Total overhead assigned

$

What is the manufacturing cost per stairway under the proposed activity-based costing? (Round answer to 2 decimal places, e.g. 12.25.)

Total cost per stairway

$

Answer 1

Predetermined Overhead = Estimated Overhead/total Machine Hour

=$956810/100000= $9.57 per Machine Hour

Computation of Cost per Unit as per Traditional Costing
Direct Material	$1,03,700.00
Direct Labor	$1,12,100.00
Ovrehead Cost ( 14600*9.57)	$1,39,722.00
Total cost for 250 Stairways	$3,55,522.00
Cost per Stairways	$1,422.09

Computation of activity Rate as per ABC costing and total Overhead assigned
					Assigned cost for 250 Stariways
Activity	Overhead (a)	Cost Driver Quantity (b)	Cost driver	Allocation Rate(c=a/b	No. of Driver (d)	Cost Allocated (c*d)
Purchasing	$73,800	600	No. of Order	$123.00	60	$7,380.00
Handing Materal	$82,080	8000	No. of Moves	$10.26	800	$8,208.00
production	$2,11,000	100000	DLH	$2.11	5100	$10,761.00
Setting up Machine	$96,250	1250	No. of Setup	$77.00	100	$7,700.00
Inspecting	$96,000	6000	No. of Inspection	$16.00	450	$7,200.00
Inventory control	127680	168000	No of Component	$0.76	16000	$12,160.00
Utilities	270000	90000	Square feet occuapied	$3.00	8000	$24,000.00
Total	$9,56,810					$77,409.00

Computation of Cost per Unit as per ABC
Direct Material per Unit	$1,03,700.00
Direct Labor per Unit	$1,12,100.00
Ovrehead Costs per Unit	$77,409.00
Total cost for 250 Stairways	$2,93,209.00
Cost per Stairways	$1,172.84