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	$	45,000		200	orders
Setting up production	Number of production runs		198,000		110	runs
Handling materials	Pounds of materials used		275,000		110,000	pounds
Machine depreciation and maintenance	Machine-hours		234,000		13,000	hours
Performing quality control	Number of inspections		65,000		50	inspections
Packing	Number of units		125,000		500,000	units
Total estimated cost		$	942,000

In addition, management estimated 8,000 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		57,000			26,000			10,000
Direct materials costs	$	37,000		$	21,000		$	17,000
Direct labor-hours		460			400			630
Number of orders		13			10			6
Number of production runs		3			4			5
Pounds of material		12,000			5,000			2,500
Machine-hours		580			130			70
Number of inspections		3			3			4
Units shipped		57,000			26,000			10,000

Actual labor costs were $14 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. (Round your answers to 2 decimal places.)

(2) Compute a predetermined rate for year 2 using direct labor-hours as the allocation base. (Round your answer to 2 decimal places.)

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). (Do not round intermediate calculations.)

  

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.) (Do not round intermediate calculations.)

Answer 1

STATEMENT SHOWING ACTIVITY RATE OF ACTIVITY POOL
			Activity	Total	Expected	Activity
ACTIVITY COST POOL			Measures	Overheads	Activity	Rate
Processing orders			Order	45000	200	225
Setting up production			Prod. Runs	198000	110	1800
handling material			Pounds	275000	110000	2.5
Machine dep			MH	234,000	13,000	18
Performing Quality control			Inspections	65,000	50	1300
packing			Units	125,000	500,000	0.25
Req 2:
Estimated OH			942000
Divided: Estimated labour hours			8000
OH rate per DLH			117.75
Req b:
Production cost
			Institution	Standard	Silver
Matrial			37000	21,000	17,000
Labour @ 14			6440	5,600	8,820
OH cost @ 117.75			54165	47,100	74,183
Total Production cost			97605	73700	100,003
Rreq c:
			Institution	Standard	Silver
Matrial			37000	21,000	17,000
Labour @ 14			6440	5,600	8,820
OH applied
Processing order @ 225 per order			2925	2250	1,350
Setting up @ 1800			5400	7200	9000
Handling @ 2.50			30000	12500	6,250
machine dep@ 18			10440	2340	1,260
Quality conttrol @ 1300			3900	3900	5,200
Packing @ 0.25 per unit			14250	6500	2500
Total Production cost			110355	61290	51,380