Question

Shaker Stairs Co. designs and builds factory-made premium wooden stairways for homes. The manufactured stairway components (spindles, risers, hangers, hand rails) permit installation of stairways of varying lengths and widths. All are of white oak wood. Budgeted manufacturing overhead costs for the year 2020 are as follows.

Overhead Cost Pools		Amount
Purchasing		$75,000
Handling materials		82,000
Production (cutting, milling, finishing)		220,000
Setting up machines		105,000
Inspecting		102,000
Inventory control (raw materials and finished goods)		126,000
Utilities		360,000
Total budgeted overhead costs		$1,070,000

For the last 4 years, Shaker Stairs Co. has been charging overhead to products on the basis of machine hours. For the year 2020, 100,000 machine hours are budgeted.

Jeremy Nolan, owner-manager of Shaker Stairs Co., recently directed his accountant, Bill Seagren, to implement the activity-based costing system that he has repeatedly proposed. At Jeremy Nolan’s request, Bill and the production foreman identify the following cost drivers and their usage for the previously budgeted overhead cost pools.

Activity Cost Pools		Cost Drivers		Estimated Use of Cost Drivers
Purchasing		Number of orders		600
Handling materials		Number of moves		8,000
Production (cutting, milling, finishing)		Direct labor hours		100,000
Setting up machines		Number of setups		1,250
Inspecting		Number of inspections		6,000
Inventory control (raw materials and finished goods)		Number of components		168,000
Utilities		Square feet occupied		90,000

Steve Hannon, sales manager, has received an order for 250 stairways from Community Builders, Inc., a large housing development contractor. At Steve’s request, Bill prepares cost estimates for producing components for 250 stairways so Steve can submit a contract price per stairway to Community Builders. He accumulates the following data for the production of 250 stairways.

Direct materials		$103,800
Direct labor		$112,400
Machine hours		15,000
Direct labor hours		5,400
Number of purchase orders		60
Number of material moves		800
Number of machine setups		100
Number of inspections		450
Number of components		16,000
Number of square feet occupied		8,000

1.Compute the predetermined overhead rate using traditional costing with machine hours as the basis.

2. What is the manufacturing cost per stairway under traditional costing?

3. Calculate activity-based overhead rate for each activity.

4. Calculate total overhead assigned under ABC.

5. What is the manufacturing cost per stairway under the proposed activity-based costing?

Answer 1