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	$	40,250		175	orders
Setting up production	Number of production runs		160,000		80	runs
Handling materials	Pounds of materials used		242,000		110,000	pounds
Machine depreciation and maintenance	Machine-hours		220,000		11,000	hours
Performing quality control	Number of inspections		44,450		35	inspections
Packing	Number of units		98,000		490,000	units
Total estimated cost		$	804,700

In addition, management estimated 7,100 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		64,000			25,000			7,000
Direct materials costs	$	42,000		$	22,000		$	17,000
Direct labor-hours		410			430			620
Number of orders		11			9			6
Number of production runs		3			3			6
Pounds of material		14,000			6,000			2,900
Machine-hours		560			150			60
Number of inspections		4			2			3
Units shipped		64,000			25,000			7,000

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.

Processing orders: Rate per order?

Setting up Production: Rate per run?

Handling Materials: Rate per pound?

Using Machines: Rate per machine hour?

Performing Quality Control: Rate per Inspection?

Packing: Rate per unit?

a2. 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).

Direct Labor for: Institutional? Standard? Silver?

Indirect Costs for: Instituional? Standard? Silver?

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.)

Institutional Standard Silver

Direct Labor?

Processing Orders?

Setting up Production?

Handling Materials?

Using Machines?

Performing Quality Control?

Packing?

Answer 1

Answer with working notes is given below