Question

Bath Fixtures Supply, Inc. (BFSI), manufactures three types of fixtures: industrial, standard, and brass. 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		$ 59,400	200 orders
Setting up production	Number of production runs		237,600	100 runs
Handling materials	Pounds of materials used		$396,000	132,000 pounds
Machine depreciation and maintenance	Machine-hours		316,800	13,200 hours
Performing quality control	Number of inspections		79,200	45 inspections
Packing	Number of units		158,400	480,000 units
Total estimated cost			$1,247,400

In addition, management estimated 7,500 direct labor-hours for year 2.
Assume that the following cost driver volumes occurred in January, year 2:
	Industrial		Standard	Brass
Number of units produced	66,000		26,400	9,900
Direct materials costs	$42,900		$26,400	$16,500
Direct labor-hours	450		450	600
Number of orders	12		9	6
Number of production runs	3		3	6
Pounds of material	16,500		6,600	3,300
Machine-hours	638		140	80
Number of inspections	3		3	3
Units shipped	66,000		26,400	9,900
Actual labor costs were $15 per hour.

Required Questions 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. Also compute a predetermined rate for year 2 using direct labor-hours as the allocation base. This question does not need to be answered.

2. Compute the production costs for each product for January using direct labor-hours as the allocation base and the predetermined rate computed in requirement (1).

3. Compute the production costs for each product for January using the cost drivers recommended by the consultant and the predetermined rates computed in requirement (1). (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.)

4. Management has seen your numbers and wants an explanation for the discrepancy between the product costs using direct labor-hours as the allocation base and the product costs using activity-based costing. Write a brief response to management.

Answer 1

Please hit LIKE button if this helped. For any further explanation, please put your query in comment, will get back to you.
Part 1
Activity	Recommended	Estimated Cost	Estimated	Units	Predetermined overhead
	Cost Driver		Cost Driver		Rate (Cost/Cost Driver)
			Activity
Processing orders	Number of orders	$                     59,400	200	Orders	$                                            297.00
Setting up production	Number of production runs	$                  237,600	100	Runs	$                                        2,376.00
Handling materials	Pounds of materials used	$                  396,000	132,000	Pounds	$                                                 3.00
Machine depreciation and maintenance	Machine-hours	$                  316,800	13,200	Hours	$                                              24.00
Performing quality control	Number of inspections	$                     79,200	45	Inspection	$                                        1,760.00
Packing	Number of units	$                  158,400	480,000	Units	$                                                 0.33
		$               1,247,400
Predetermined overhead (Based on DLH)	$1,247,400/7,500	$                     166.32
Part 2
		Industrial	Standard	Brass
Direct Material Cost		$                     42,900	$                             26,400	$                             16,500
Direct Labor Cost	DLH*$15	$                       6,750	$                                6,750	$                                9,000
Overhead Cost	DLH*$166.32	$                     74,844	$                             74,844	$                             99,792
Total Product Cost		$                  124,494	$                           107,994	$                           125,292
Part 3
		Industrial	Standard	Brass
Direct Material Cost		$                     42,900	$                             26,400	$                             16,500
Direct Labor Cost	DLH*$15	$                       6,750	$                                6,750	$                                9,000
Overhead Cost		$                  102,564	$                             46,953	$                             36,405
Total Product Cost		$                  152,214	$                             80,103	$                             61,905
		Activity			Overhead Allocation
Activity	Predetermined Rate	Industrial	Standard	Brass	Industrial	Standard	Brass
Processing orders	$                                                 297.00	12	9	6	3,564	$        2,673	$       1,782
Setting up production	$                                             2,376.00	3	3	6	7,128	$        7,128	$     14,256
Handling materials	$                                                      3.00	16,500	6,600	3,300	49,500	$      19,800	$       9,900
Machine depreciation and maintenance	$                                                   24.00	638	140	80	15,312	$        3,360	$       1,920
Performing quality control	$                                             1,760.00	3	3	3	5,280	$        5,280	$       5,280
Packing	$                                                      0.33	66,000	26,400	9,900	21,780	$        8,712	$       3,267
					$                                          102,564	$      46,953	$     36,405
Part 4
There is gap since based on direct labor hours, cost was allocated on DLH level ignoring rest of the cost drivers.
When all the cost drivers considered, it was allocated more accurately