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 2017 are as follows.

Overhead Cost Pools Amont ($)

Purchasing 48,000

Handling materials 50,000

Production (cutting, milling, finishing) 137,000

Setting up machines 85,000
Inspecting 60,000
Inventory control (RM and FG) 85,000

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 $580,000 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 5,800
Production (cutting, milling, finishing)   Direct labor hours 65,000
Setting up machines   Number of setups 1,700
Inspecting   Number of inspections   4,100
Inventory control (RM and FG)   Number of components   40,000

Utilities Square feet occupied 55,000

Debbie Steiner, sales manager, has received an order for 17 luxury armoires from Thom’s Interior Design. At Debbie’s request, Bob prepares cost estimates for producing 17 armoires so Debbie can submit a contract price per armoire to Thom’s. He accumulates the following data for the production of 17 armoires.

DM Cost ($) 5,100
DL Cost ($) 3,500
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

a) What is the unit manufacturing cost per armoire under traditional costing?
b) What is the unit manufacturing cost per armoire under the proposed activity-based costing?

Answer 1

1) Predetermined overhead rate using materials cost:
Predetermined overhead rate =$565,000 ÷ $580,000 =	97.41%	of  materials cost
2)
Manufacturing cost per armoire under traditional costing:
Direct materials	$5,100
Direct labor	$3,500
Overhead (5,100 X 97.41%)	$4,968.10
Total cost of 17 armoires	$13,568
Cost per armoire ($13,568 ÷ 17)	$798.12
3)
Computation of Activity-Based Overhead Rate	A	B		A/B
Activity Cost Pools	Estimated Overhead	Total Estimated Drivers		Activity-Based = Overhead Rate		Expected Use of Drivers	Cost Assigned
Purchasing	$48,000	500	orders	$96	per order	3	$288	orders
Handling materials	$50,000	5800	moves	$8.62	per Move	32	$276	moves
Production (cutting, milling, finishing)	$137,000	65000	Direct labor hours	$2.11	per DL	200	$422	Direct labor hours
Setting up machines	$85,000	1700	setups	$50.00	per set up	4	$200	setups
Inspecting	$60,000	4100	inspections	$14.63	per inspection	20	$293	inspections
Inventory control (raw materials     and finished goods)	$85,000	40000	components	$2.13	per component	640	$1,360	components
Utilities	$100,000	55000	Square feet occupied	$1.82	per sq. feet	320	$582	Square feet occupied
						Total overhead	$3,420
Manufacturing cost per armoire under  activity-based costing:
Direct materials	$5,100
Direct labor	$3,500
Overhead	$3,419.90
Total cost of 17 armoires	$12,020
Cost per armoire ($12,020 ÷ 17)	$707.05