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

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

$

Answer 1

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

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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

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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

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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