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	$	38,400		120	runs
Processing orders	Number of orders		52,800		220	orders
Handling materials	Pounds of materials		14,000		7,000	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		42,000		21,000	units
		$	261,200

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			600			300
Direct materials costs	$	4,000		$	3,000		$	1,500
Direct labor-hours		100			130			100
Number of orders		8			8			5
Number of production runs		1			3			7
Pounds of material		400			800			200
Machine-hours		500			200			400
Number of inspections		1			1			2
Units shipped		900			600			200

Direct labor costs were $20 per hour.

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.)

b. Compute the production costs for each product for February using direct labor-hours as the allocation base and the predetermined rate computed in requirement a. (Do not round intermediate calculations.)

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 a.(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.)

Answer 1

1)

Activity	Recommended Base	Estimated Cost	Estimated Cost-Driver Units		Allocation Rate
Setting up production	Number of production runs	$      38,400.00	120	runs	$                320.00
Processing orders	Number of orders	$      52,800.00	220	orders	$                240.00
Handling materials	Pounds of materials	$      14,000.00	7,000	pounds	$                    2.00
Using machines	Machine-hours	$      66,000.00	11,000	hours	$                    6.00
Providing quality management	Number of inspections	$      48,000.00	40	inspections	$            1,200.00
Packing and shipping	Units shipped	$      42,000.00	21,000	units	$                    2.00
Direct labor hour rate		$    261,200.00	2,000	Direct Labor Hours	$                130.60

2)

	Short	Medium	Tall
Direct materials costs	$    6,000.00	$    3,750.00	$    3,000.00
Direct Labor	$    2,000.00	$    2,400.00	$    2,200.00
Overhead	$ 13,060.00	$ 15,672.00	$ 14,366.00
Production Cost	$ 21,060.00	$ 21,822.00	$ 19,566.00

3)

	Short	Medium	Tall
Direct materials costs	$    6,000.00	$    3,750.00	$    3,000.00
Direct Labor	$    2,000.00	$    2,400.00	$    2,200.00
Setting up production	$        320.00	$        960.00	$    2,240.00
Processing orders	$    1,920.00	$    1,920.00	$    1,200.00
Handling materials	$        800.00	$    1,600.00	$        400.00
Using machines	$    3,000.00	$    1,200.00	$    2,400.00
Providing quality management	$    1,200.00	$    1,200.00	$    2,400.00
Packing and shipping	$    1,800.00	$    1,200.00	$        400.00
Production Cost	$ 17,040.00	$ 14,230.00	$ 14,240.00