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	$	42,875		175	orders
Setting up production	Number of production runs		209,000		110	runs
Handling materials	Pounds of materials used		308,000		110,000	pounds
Machine depreciation and maintenance	Machine-hours		200,000		10,000	hours
Performing quality control	Number of inspections		70,000		50	inspections
Packing	Number of units		127,500		510,000	units
Total estimated cost		$	957,375

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		55,000			26,000			8,000
Direct materials costs	$	37,000		$	22,000		$	17,000
Direct labor-hours		450			440			610
Number of orders		11			9			6
Number of production runs		3			4			5
Pounds of material		17,000			6,000			3,200
Machine-hours		560			140			70
Number of inspections		2			3			4
Units shipped		55,000			26,000			8,000

Actual labor costs were $16 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.
(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).

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

a)				Estimated	Driver	rate
1)				cost (a)	(b)	c=a/b
	processing orders			42,875	175	245	per order
	Setting up production			209,000	110	1900	per run
	handling materials			308,000	110,000	2.8	per pound
	using machines			200,000	10,000	20	per mh
	performing quality control			70,000	50	1400	per inspection
	packing			127,500	510,000	0.25	per unit
	Estimated activity				957,375
	estimated allocation base				7,800
	predetermined rate for direct labor				122.74
	production cost using direct labor hours
			institutional	standard	Silver	total
b)	Account
	Direct materials		37000	22000	17000	76000
	direct labor		7200	7040	9760	24000
	indirect costs		55233	54006	74872	184111
	total cost		99433	83046	101632	284111
		direct labor = DLH*$16 per hour
		indirect cost = dLH*$122.74
c)			institutional	standard	Silver	total
	Account
	Direct materials		37000	22000	17000	76000
	direct labor		7200	7040	9760	24000
	Indirect costs
	processing orders		2695	2205	1470	6370
	Setting up production		5700	7,600	9500	22800
	handling materials		47600	16800	8960	73360
	using machines		11200	2800	1400	15400
	performing quality control		2800	4,200	5600	12600
	packing		13750	6500	2000	22250
	total cost		127945	69145	55690	252780