Question

College Supply Company (CSC) makes three types of drinking glasses: short, medium, and tall. It presently applies overhead using a predetermined rate based on direct labor-hours. A group of company employees recommended that CSC switch to activity-based costing and identified the following activities, cost drivers, estimated costs, and estimated cost driver units for Year 5 for each activity center.

Activity	Recommended Cost Driver	Estimated Cost			Estimated Cost Driver Units
Setting up production	Number of production runs	$	24,000		80	runs
Processing orders	Number of orders		48,000		200	orders
Handling materials	Pounds of materials		18,000		9,000	pounds
Using machines	Machine-hours		66,000		11,000	hours
Providing quality management	Number of inspections		48,000		40	inspections
Packing and shipping	Units shipped		40,000		20,000	units
		$	244,000

In addition, management estimated 2,000 direct labor-hours for year 5.

Assume that the following cost driver volumes occurred in February, year 5:

	Short			Medium			Tall
Number of units produced		900			400			400
Direct materials costs	$	3,000		$	3,000		$	2,500
Direct labor-hours		90			100			90
Number of orders		7			8			4
Number of production runs		2			4			8
Pounds of material		300			900			300
Machine-hours		600			300			200
Number of inspections		1			3			2
Units shipped		900			400			300
Required: a. Compute a predetermined overhead rate for year 5 for each cost driver recommended by the employees. Also compute a predetermined rate using direct labor-hours as the allocation base. (Round your answers to 2 decimal places.) c. Compute the production costs for each product for February using the cost drivers recommended by the employees and the predetermined rates computed in requirement (Note: Do not assume that total overhead applied to products in February will be the same for activity-based costing as it was for the labor-hour-based allocation.) (Do not round intermediate calculations.)

Direct labor costs were $18 per hour.

	Short Medium Tall Direct materials $3,000 $3,000 $2,500 Direct labor Setting up production Processing orders Handling materials Using machines Performing quality management Shipping Total costs $3,000 $3,000 $2,500

Answer 1

1)

Computation of Pre Determined Overhead rate : (Cost Driver Basis)

Setting up production = $24000/ 80 runs = $ 300 per run

Processing orders = $ 48000/ 200 orders = $ 240 per order

Handling materials = $ 18000/ 9000 pounds =$ 2 per pound

using Machine = $ 66000/11000 Hours = $ 6 per Machine hour

Providing Quality Management = $ 48000/ 40 Inspections = $ 1200 per inspection

Packing and shipping = $ 40000/ 20000 units = $ 2 per unit Packing cost

Computation of Pre Determined Overhead rate using direct labour for allocaation

Rate = Total Cost / Direct labour Hours = $ 244000/ 2000 = 122 per Direct labour Hour

2)  Computation the production costs for each product for February using the cost drivers recommended by the employees and the predetermined rates computed in requirement

Particulars	short	Medium
Direct materials	$3,000	$3,000	$2,500
Direct labor	90*18= 1620	100*18= 1800	100*18= 1800
Setting up production	2*300= 600	4*300=1200	8*300= 2400
Processing orders	7*240=1680	8*240=1920	4*240=960
Handling materials	300*2=600	900*2=1800	300*2=600
Using machines	600*6=3600	300*6=1800	200*6=1200
Performing quality management	1*1200=1200	3*1200=3600	2*1200=2400
Shipping	900*2=1800	400*2=800	300*2=600
Total costs	$ 14100	$ 15920	$ 12460