Question

Kitchen Supply, Inc. (KSI), manufactures three types of flatware: institutional, standard, and silver. It applies all indirect costs according to a predetermined rate based on direct labor-hours. A consultant recently suggested that the company switch to an activity-based costing system and prepared the following cost estimates for year 2 for the recommended cost drivers.

Activity	Recommended Cost Driver	Estimated Cost			Estimated Cost Driver Activity
Processing orders	Number of orders	$	41,000		200	orders
Setting up production	Number of production runs		216,000		120	runs
Handling materials	Pounds of materials used		250,000		100,000	pounds
Machine depreciation and maintenance	Machine-hours		231,000		11,000	hours
Performing quality control	Number of inspections		59,850		45	inspections
Packing	Number of units		122,500		490,000	units
Total estimated cost		$	920,350

In addition, management estimated 7,100 direct labor-hours for year 2.

Assume that the following cost driver volumes occurred in January, year 2.

	Institutional			Standard			Silver
Number of units produced		62,000			25,000			8,000
Direct materials costs	$	38,000		$	25,000		$	17,000
Direct labor-hours		430			490			580
Number of orders		11			10			5
Number of production runs		4			2			6
Pounds of material		17,000			6,000			3,200
Machine-hours		590			150			80
Number of inspections		4			3			3
Units shipped		62,000			25,000			8,000

Actual labor costs were $15 per hour.

Required:

a.

(1) Compute a predetermined overhead rate for year 2 for each cost driver using the estimated costs and estimated cost driver units prepared by the consultant.
(2) Compute a predetermined rate for year 2 using direct labor-hours as the allocation base.

b. Compute the production costs for each product for January using direct labor-hours as the allocation base and the predetermined rate computed in requirement a(2).

c. Compute the production costs for each product for January using the cost drivers recommended by the consultant and the predetermined rates computed in requirement a. (Note: Do not assume that total overhead applied to products in January will be the same for activity-based costing as it was for the labor-hour-based allocation.)

Compute a predetermined overhead rate for year 2 for each cost driver using the estimated costs and estimated cost driver units prepared by the consultant. (Round your answers to 2 decimal places.)

	Activity Rate Processing orders    per order Setting up production per run Handling materials per pound Using machines per machine hour Performing quality control per inspection Packing per unit

Compute a predetermined rate for year 2 using direct labor-hours as the allocation base

	Predetermined rate per direct labor-hour

Compute the production costs for each product for January using direct labor-hours as the allocation base and the predetermined rate computed in requirement a(2). (Do not round intermediate calculations.)

	Account Institutional Standard Silver Total Direct materials $38,000 $25,000 $17,000 $80,000 Direct labor Indirect costs Total cost

Answer 1

Above answer have been answered in detail and step-wise basis.

Total Production overheads have been calculated in both methods i.e as per Direct labour hours basis and Activity cost basis.