Question

Problem 5-39A (Part Level Submission)

Stellar Stairs Co. designs and builds factory-made premium wooden stairs for homes. The manufactured stair components (spindles, risers, hangers, hand rails) permit installation of stairs of varying lengths and widths. All are made of white oak wood. The company’s budgeted manufacturing overhead costs for 2016 are as follows:

Overhead Cost Pools		Amount
Purchasing		$69,000
Handling materials		82,000
Production (cutting, milling, finishing)		210,000
Setting up machines		95,000
Inspecting		90,000
Inventory control (raw materials and finished goods)		126,000
Utilities		180,000
Total budget overhead costs		$852,000

For the last four years, Stellar Stairs Co. has been charging overhead to products on the basis of machine hours. For 2016, it has budgeted 100,000 machine hours.

Heather Fujar, owner-manager of Stellar Stairs Co., recently directed her accountant, Kiko Nishikawa, to implement the activity-based costing system that she has repeatedly proposed. At Heather Fujar’s request, Kiko and the production foreperson 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			8,390
Production
(cutting, milling, finishing)		Direct labour hours			102,340
Setting up machines		Number of set-ups			1,740
Inspecting		Number of inspections			6,320
Inventory control
(raw materials and finished goods)		Number of components			170,030
Utilities		Square metres occupied			10,220

   Jason Dion, sales manager, has received an order for 280 stairs from Community Builders, Inc., a large housing development contractor. At Jason’s request, Kiko prepares cost estimates for producing components for 280 stairways so Jason can submit a contract price per stair to Community Builders. She accumulates the following data for the production of 280 stairways:

Direct materials		$103,600
Direct labour		112,000
Machine hours		14,500
Direct labour hours		5,000
Number of purchase orders		60
Number of material moves		800
Number of machine set-ups		100
Number of inspections		450
Number of components		16,000
Number of square metres occupied		800

What is the manufacturing cost per stairway under the proposed activity-based costing? (Round answer to 2 decimal places, e.g. 15.25.)

Answer 1

Step 1 : Activity Rate

Step 2 : Overhead cost allocation

Step 3 : Manufacturing Cost

Particulars	$
Direct Material	103,600
Direct Labor	112,000
Overhead cost	62,762
Total Manufacturing Cost	278,362

Step 4 : Manufacturing cost per Stairway

Manufacturing Cost = $278,362

Number of stairways = 280

Manufacturing cost per stairways = $278,362 / 280 stairways = $994.15 per stairways

All the best...