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	$	30,000		100	runs
Processing orders	Number of orders		48,000		200	orders
Handling materials	Pounds of materials		18,000		9,000	pounds
Using machines	Machine-hours		84,000		12,000	hours
Providing quality management	Number of inspections		48,000		40	inspections
Packing and shipping	Units shipped		42,000		21,000	units
		$	270,000

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			500			400
Direct materials costs	$	4,000		$	2,000		$	2,500
Direct labor-hours		90			120			110
Number of orders		9			9			5
Number of production runs		2			5			8
Pounds of material		400			800			200
Machine-hours		600			300			300
Number of inspections		1			1			2
Units shipped		900			500			300

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

a.

Setting up production	$300 ($30,000/100)	per production run
Processing orders	240 (48,000/200)	per order
Handling materials	2 (18,000/9,000)	per pound
Using machines	7 (84,000/12,000)	per machine hour
Providing quality management	1,200 (48,000/40)	per inspection
Packing and shipping	2 (42,000/21,000)	per unit shipped

Predetermined overhead rate = Estimated manufacturing overhead / Direct labor hours

Predetermined overhead rate = $270,000/2,000 = $135 per direct labor hour

b

	Short	Medium	Tall
Direct material	$4,000	$2,000	$2,500
Direct labor	1,800 (90*$20)	2,400 (120*$20)	2,200 (110*$20)
Applied overhead	12,150 (90*$135)	16,200 (120*$135)	14,850 (110*$135)
Total production cost	$17,950	$20,600	$19,550

c.

	Short	Medium	Tall
Direct material	$4,000	$2,000	$2,500
Direct labor	1,800 (90*$20)	2,400 (120*$20)	2,200 (110*$20)
Setting up production	600 (2*$300)	1,500 (5*$300)	2,400 (8*$300)
Processing orders	2,160 (9*$240)	2,160 (9*$240)	1,200 (5*$240)
Handling materials	800 (400*$2)	1,600 (800*$2)	400 (200*$2)
Using machines	4,200 (600*$7)	2,100 (300*$7)	2,100 (300*$7)
Providing quality management	1,200 (1*$1,200)	1,200 (1*$1,200)	2,400 (2*$1,200)
Packing and shipping	1,800 (900*$2)	1,000 (500*$2)	600 (300*$2)
Total production costs	$16,560	$13,960	$13,800