Question

In: Accounting

Shaker Stairs Co. designs and builds factory-made premium wooden stairways for homes. The manufactured stairway components...

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

Correct answer iconYour answer is correct.

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

Correct answer iconYour answer is correct.

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

Cost per stairway

$

Correct answer iconYour answer is correct.

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.

Incorrect answer iconYour answer is incorrect.

Caluclate total overhead assigned under ABC.

Total overhead assigned

$

eTextbook and Media

Incorrect answer iconYour answer is incorrect.

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

$

Solutions

Expert Solution

1

Compute the predetermined overhead rate using traditional costing

Predetermined overhead rate

= $ 956,810 ÷ 100,000 hrs.

= $9.57 per machine hour

Predetermined overhead rate

9.57

______________________________________________

2

Manufacturing cost per stair under traditional costing:

Direct materials.

103,700

Direct Labor

112,100

Overhead (14,600 X $9.57)

139722

Total cost of 250 stairs

355,522

Cost per stair ($355,522 ÷ 250 )

1422.1

_________________________________________

3

Calculate activity-based overhead rate for each activity

Expected Use of

Cost Drivers

activity-based overhead rate

Activity Cost Pools

Amount

Cost Drivers

(A)

(B)

C=A/B

Purchasing

73800

600

Number
of orders

123.00

Handling materials

82080

8000

Number of moves

10.26

Production (cutting, milling, finishing)

211000

100000

Direct labor hours

2.11

Setting up machines

96250

1250

Number of setups

77.00

Inspecting

96000

6000

Number of inspections

16.00

Inventory control (raw materials and finished goods)

127680

168000

Number of components

0.76

Utilities

270000

90,000

Square feet occupied

3.00

956810

__________________________________________

4

Activity Cost Pools

Rat

Activity

Total Cost

(A)

(B)

(A*B)

Purchasing

60

123.00

7380

Handling materials

800

10.26

8208

Production (cutting, milling, finishing)

5100

2.11

10761

Setting up machines

100

77.00

7700

Inspecting

450

16.00

7200

Inventory control (raw materials and finished goods)

16,000

0.76

12160

Utilities

8,000

3.00

24000

Total Cost assigned

77409

Total Cost assigned

77409

___________________________________________

5

What is the manufacturing cost per stairway under the proposed activity-based costing

Direct materials.

103,700

Direct Labor

112,100

Overhead (As calculated above)

77409

Total cost of 250 stairs

293,209

Cost per stair ($293209÷ 250 )

1172.8

Cost per stair as per activity based costing

1172.8


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