Question

Use below information for Questions 5 to 6:

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 2017 are as follows.

Overhead Cost Pools	Amont ($)
Purchasing	47,000
Handling materials	50,000
Production (cutting, milling, finishing)	136,000
Setting up machines	85,000
Inspecting	60,000
Inventory control (raw materials and finished goods)	87,000
Utilities	100,000

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 $570,000 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.

        Overhead Cost Pools                                                                  Activity Cost Drivers                   Expected Use of Cost Drivers

     Purchasing                                                                                              Number of orders                                          500

     Handling materials Number of moves                                          5,700

      Production (cutting, milling, finishing) Direct labor hours                                        65,000

Setting up machines                                                                              Number of setups 1,600 Inspecting                                                                                              Number of inspections                                     4,300

      Inventory control (raw materials and finished goods) Number of components                                   40,000

     Utilities                                                                                                 Square feet occupied                                     57,000

Debbie Steiner, sales manager, has received an order for 16 luxury armoires from Thom’s Interior Design. At Debbie’s request, Bob prepares cost estimates for producing 16 armoires so Debbie can submit a contract price per armoire to Thom’s. He accumulates the following data for the production of 16 armoires.

DM Cost ($)	5,300
DL Cost ($)	3,700
DL Hours	200
Number of Purchase Orders	3
Number of Materials Moves	32
Number of Machine Setups	4
Number of Inspections	20
Number of Components	640
Number of Square Feet Occupied	320

Q-5) What is the unit manufacturing cost per armoire under traditional costing?

Q-6) What is the unit manufacturing cost per armoire under the proposed activity-based costing?

Answer 1

Predetermined overhead rate	99.12%
565000/570000
Q-5
Manufacturing cost per armoire under traditional costing:
Direct materials	$5,300.00
Direct labor	$3,700.00
Manufacturing overhead (5300*99.12%)	$5,253.51
Total costs	$14,253.51
No .of armoires	16
Cost per armoire	$890.84

Q-6
Overhead Cost Pools	Activity Cost Drivers	Overhead costs	Activity Pool	Activity rate (a)	Activity rquired for 16 Armoires (b)	Overhead assinged (a*b)
Purchasing	Number of orders	$47,000.00	500	$94.00	3	$282.00
Handling materials	Number of moves	$50,000.00	5,700	$8.77	32	$280.70
Production	Direct labor hours	$136,000.00	65,000	$2.09	200	$418.46
Setting up machines	Number of setups	$85,000.00	1,600	$53.13	4	$212.50
Inspecting	Number of inspections	$60,000.00	4,300	$13.95	20	$279.07
Inventory control	Number of components	$87,000.00	40,000	$2.18	640	$1,392.00
Utilities	Square feet occupied	$100,000.00	57,000	$1.75	320	$561.40
Total		$565,000.00				$3,426.14
Q-6
Manufacturing cost per armoire under proposed activity-based costing:
Direct materials	$5,300.00
Direct labor	$3,700.00
Manufacturing overhead	$3,426.14
Total costs	$12,426.14
No .of armoires	16
Cost per armoire	$776.63