Question

Luxury Furniture designs and builds factory-made, premium, wood armoires for homes. All are of white oak. Its budgeted manufacturing overhead costs for the year 2014 are as follows.

Overhead Cost Pools Amount Purchasing $ 45,000 Handling materials 50,000 Production (cutting, milling, finishing) 130,000 Setting up machines 85,000 Inspecting 60,000 Inventory control (raw materials and finished goods) 80,000 Utilities 100,000 Total budgeted overhead costs $550,000

For the last 4 years, Luxury Furniture has been charging overhead to products on the basis of materials cost. For the year 2017, materials cost of $500,000 were budgeted.

Jim Brigham, owner-manager of Luxury Furniture, recently directed his accountant, Bob Borke, to implement the activity-based costing system that he has repeatedly proposed. At Jim Brigham’s request, Bob and the production foreman identify the following cost drivers and their usage for the previously budgeted overhead cost pools.

Expected Use of Overhead Cost Pools Activity Cost Drivers Cost Drivers Purchasing Number of orders 500 Handling materials Number of moves 5,000 Production (cutting, milling, finishing) Direct labor hours 65,000 Setting up machines Number of setups 1,000 Inspecting Number of inspections 4,000 Inventory control (raw materials and finished goods) Number of components 40,000 Utilities Square feet occupied 50,000


CONTINUED  

Debbie Steiner, sales manager, has received an order for 12 luxury armoires from Thom’s Interior Design. At Debbie’s request, Bob prepares cost estimates for producing 12 armoires so Debbie can submit a contract price per armoire to Thom’s. He accumulates the following data for the production of 12 armoires. Direct materials $5,200 Direct labor $3,500 Direct labor hours 200 Number of purchase orders 3 Number of material moves 32 Number of machine setups 4 Number of inspections 20 Number of components 640 Number of square feet occupied 320


Instructions (a) Compute the predetermined overhead rate using traditional costing with materials cost as the basis. (b) What is the manufacturing cost per armoire under traditional costing? (c) What is the manufacturing cost per armoire under the proposed activity-based costing? (Prepare all of the necessary schedules.)

Answer 1

Answer with working notes is given below