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	$	41,125		175	orders
Setting up production	Number of production runs		170,000		100	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		68,500		50	inspections
Packing	Number of units		96,000		480,000	units
Total estimated cost		$	856,625

In addition, management estimated 7,700 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		63,000			27,000			8,000
Direct materials costs	$	37,000		$	23,000		$	13,000
Direct labor-hours		480			450			640
Number of orders		10			10			6
Number of production runs		2			4			6
Pounds of material		14,000			6,000			3,400
Machine-hours		610			160			100
Number of inspections		3			3			3
Units shipped		63,000			27,000			8,000

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.)

	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

(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).(Do not round intermediate calculations.)

	Account Institutional Standard Silver Total Direct materials $37,000 $23,000 $13,000 $73,000 Direct labor Indirect costs Total cost

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.)

	Account Institutional Standard Silver Total Direct materials $37,000 $23,000 $13,000 $73,000 Direct labor Indirect costs Processing orders Setting up production Handling materials Using machines Performing quality control Packing Total cost

Thank you for your time and help!

Answer 1

a)				Estimated	Driver	rate
1)				cost (a)	(b)	c=a/b
	processing orders			41,125	175	235	per order
	Setting up production			170,000	100	1700	per run
	handling materials			250,000	100,000	2.5	per pound
	using machines			231,000	11,000	21	per mh
	performing quality control			68,500	50	1370	per inspection
	packing			96,000	480,000	0.2	per unit
				856,625
	Estimated activity				856,625
	estimated allocation base				7,700
	predetermined rate for direct labor				111.25
	production cost using direct labor hours
			institutional	standard	Silver	total
b)	Account
	Direct materials		37000	23000	13000	73000
	direct labor		6720	6300	8960	21980
	indirect costs		53400	50063	71200	174663
	total cost		97120	79363	93160	269643
		direct labor = DLH*$14 per hour
		indirect cost = dLH*$111.25
c)			institutional	standard	Silver	total
	Account
	Direct materials		37000	23000	13000	73000
	direct labor		6750	6300	8960	22010
	Indirect costs
	processing orders		2350	2350	1410	6110
	Setting up production		3400	6,800	10200	20400
	handling materials		35000	15000	8500	58500
	using machines		12810	3360	2100	18270
	performing quality control		4110	4,110	4110	12330
	packing		12600	5400	1600	19600
	total cost		114020	66320	49880	230220