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	$	52,875		225	orders
Setting up production	Number of production runs		144,000		80	runs
Handling materials	Pounds of materials used		280,000		100,000	pounds
Machine depreciation and      maintenance	Machine-hours		240,000		12,000	hours
Performing quality control	Number of inspections		55,600		40	inspections
Packing	Number of units		138,000		460,000	units
Total estimated cost		$	910,475

In addition, management estimated 7,800 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			27,000			8,000
Direct materials costs	$	43,000		$	23,000		$	15,000
Direct labor-hours		480			420			560
Number of orders		13			10			6
Number of production runs		2			2			7
Pounds of material		16,000			5,000			3,000
Machine-hours		580			140			70
Number of inspections		3			3			3
Units shipped		57,000			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.)

           

(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). (Round "Indirect costs" to the nearest dollar.)

       

(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.)

      

Answer 1

Answer a(1)

Activity	Estimated Cost	Qty of Cost Driver		Overhead rate
Processing orders	52,875	225	Orders	235.00	per order
Setting up production	1,44,000	80	runs	1,800.00	per run
Handling materials	2,80,000	1,00,000	pounds	2.80	per pound
Machine depreciation and maintenance	2,40,000	12,000	per machine hour	20.00	per machine hour
Performing quality control	55,600	40	Inspection	1,390.00	per Inspection
Packing	1,38,000	4,60,000	units	0.30	per unit
Total	9,10,475

Answer a(2)

Total Overhead	9,10,475
Total Estimated Direct Labour Hours	7,800
Overhead Rate per Direct Labour Hour	116.73

Answer b

Calculation of Product cost using direct labour hour as allocation base:

	Institutional	Standard	Silver
Direct Material	43,000	23,000	15,000
Direct Labour	6,720	5,880	7,840
Ovehead allocated	56,029	49,026	65,367
Total Cost	1,05,749	77,906	88,207
No. of units produced	57,000	27,000	8,000
Product cost per unit	1.86	2.89	11.03

Answer c

Allocation of overhead based on cost drivers recommended by the consultant and the predetermined rates computed in requirement ( a ) (Activity Based Costing)

		Institutional		Standard		Silver
Overhead rate		Driver Utilised	Overhead Assigned	Driver Utilised	Overhead Assigned	Driver Utilised	Overhead Assigned
235.00	per order	13	3,055	10	2,350	6	1,410
1,800.00	per run	2	3,600	2	3,600	7	12,600
2.80	per pound	16,000	44,800	5,000	14,000	3,000	8,400
20.00	per machine hour	580	11,600	140	2,800	70	1,400
1,390.00	per Inspection	3	4,170	3	4,170	3	4,170
0.30	per unit	57,000	17,100	27,000	8,100	8,000	2,400
		Total Ovehead	84,325	Total Ovehead	35,020	Total Ovehead	30,380
		Units Produced	57,000	Units Produced	27,000	Units Produced	8,000
		Overhead Cost per unit	1.48	Overhead Cost per unit	1.30	Overhead Cost per unit	3.80

	Institutional	Standard	Silver
Direct Material	43,000	23,000	15,000
Direct Labour	6,720	5,880	7,840
Ovehead allocated	84,325	35,020	30,380
Total Cost	1,34,045	63,900	53,220
No. of units produced	57,000	27,000	8,000
Product cost per unit	2.35	2.37	6.65