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	$	36,750		175	orders
Setting up production	Number of production runs		180,000		100	runs
Handling materials	Pounds of materials used		260,000		130,000	pounds
Machine depreciation and maintenance	Machine-hours		286,000		13,000	hours
Performing quality control	Number of inspections		52,000		40	inspections
Packing	Number of units		122,500		490,000	units
Total estimated cost		$	937,250

In addition, management estimated 7,400 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		62,000			23,000			11,000
Direct materials costs	$	36,000		$	27,000		$	12,000
Direct labor-hours		460			470			560
Number of orders		12			9			7
Number of production runs		4			3			6
Pounds of material		13,000			5,000			2,900
Machine-hours		590			160			90
Number of inspections		3			2			3
Units shipped		62,000			23,000			11,000

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. (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. (Round your answer to 2 decimal places.)

Predetermined rate per direct labor-hour

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	$36,000	$27,000	$12,000	$75000
Direct Labor
Indirect Costs
Total Costs

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	$36,000	$27,000	$12,000	$75,000
Direct Labor
Indirect Costs
Processing orders
Setting up production
Handling materials
Using machines
Performing quality control
Packing
Total Cost

Answer 1

Answer a1
Computation of a predetermined overhead rate
Predetermined overhead rate = Estimated cost of the activity / Estimated Cost driver activity
Activity	Calculation	Rate
Processing orders	= $36750 / 175 orders	$210.00	per order
Setting up production	= $180000 / 100 runs	$1,800.00	per run
Handling materials	= $260000 / 130000 pounds	$2.00	per pound
Using machines	= $286000 / 13000 machine hours	$22.00	per machine hour
Performing quality control	= $52000 / 40 inspection	$1,300.00	per inspection
Packing	= $122500 / 490000 units	$0.25	per unit
Answer a2
Computation of a predetermined overhead rate using direct labor-hours as the allocation base.
Predetermined overhead rate = Total estimated overheads / Estimated direct labour hours for year 2
Predetermined overhead rate = $937250 / 7400 direct labor hours = $126.66 per direct labor hour
Answer b
Computation the production costs for each product for January using direct labor-hours as the allocation base
Account	Institutional	Standard	Silver	Total
Direct Materials	$36,000.00	$27,000.00	$12,000.00	$75,000.00
Direct Labor [$16 per DLH]	$7,360.00	$7,520.00	$8,960.00	$23,840.00
Indirect Costs	$58,261.49	$59,528.04	$70,927.03	$188,716.55
Total Costs	$101,621.49	$94,048.04	$91,887.03	$287,556.55
Answer b
Computation the production costs for each product for January using the cost drivers
Account	Institutional	Standard	Silver	Total
Direct Materials	$36,000.00	$27,000.00	$12,000.00	$75,000.00
Direct Labor	$7,360.00	$7,520.00	$8,960.00	$23,840.00
Indirect Costs
Processing orders	$2,520.00	$1,890.00	$1,470.00	$5,880.00
Setting up production	$7,200.00	$5,400.00	$10,800.00	$23,400.00
Handling materials	$26,000.00	$10,000.00	$5,800.00	$41,800.00
Using machines	$12,980.00	$3,520.00	$1,980.00	$18,480.00
Performing quality control	$3,900.00	$2,600.00	$3,900.00	$10,400.00
Packing	$15,500.00	$5,750.00	$2,750.00	$24,000.00
Total Cost	$111,460.00	$63,680.00	$47,660.00	$222,800.00