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 2011 are as follows.
Overhead Cost Pools_____________ Amount
Purchasing ................... $ 35,000
Handling materials ................ 50,000
Production (cutting, milling, finishing) ........ 130,000
Setting up machines ................ 55,000
Inspecting .................... 60,000
Inventory control (raw materials and finished goods) ... 80,000
Utilities ..................... 100,000
Total budget overhead costs ............. $510,000
For the last 4 years, Luxury Furniture has been charging overhead to products on the basis of materials cost. For the year 2011, materials cost of $500,000 were budgeted. Sam Pluemer, owner-manager of Luxury Furniture, recently directed his accountant, Ben Borke, to implement the activity-based costing system that he has repeatedly proposed.
At Sam Pluemer€™s request, Ben and the production foreman identify the following cost drivers and their usage for the previously budgeted overhead cost pools.

Tricia Steiner, sales manager, has received an order for 10 luxury armoires from Thom€™s Interior Design. At Tricia€™s request, Ben prepares cost estimates for producing 10 armoires so Tricia can submit a contract price per armoire to Thom€™s. He accumulates the following data for the production of 10 armoires.
Direct materials ............. $5,200
Direct labor .............. $3,500
Direct labor hours ............. 200
Number of purchase orders ........ 3
Number of material moves ......... 32
Number of machine setups ......... 4
Number of inspections .......... 20
Number of components ............ 640
Number of square feet occupied ........ 320

Instructions
(a) Compute the predetermined overhead rate using traditional costing with materials cost as the basis.
(b) What is the manufacturing cost per armoire under traditional costing?
(c) What is the manufacturing cost per armoire under the proposed activity-based costing? (Prepare all of the necessary schedules.)
(d) Which of the two costing systems is preferable in pricing decisions andwhy?

Transcribed Image Text:

Expected Use of Cost Drivers Overhead Cost Pools Activity Cost Drivers Number of orders Number of moves Purchasing Handling materials Production (cutting, milling, finishing Setting up machines Inspecting Inventory control (raw materials 500 5,000 65,000 1,000 4,000 Direct labor hours Number of setups Number of inspections and finished goods) Utilities Number of components Square feet occupied 40,000 50,000