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 2012 are as follows.

For the last 4 years, Luxury Furniture has been charging overhead to products on the basis of materials cost. For the year 2012, materials cost of $500,000 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.

Debbie Steiner, sales manager, has received an order for 12 luxury armoires from Thom’s Interior Design. At Debbie’s request, Bob prepares cost estimates for producing 12 armoires so Debbie can submit a contract price per armoire to Thom’s. He accumulates the following data for the production of 12 armoires 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 and why?

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Overhead Cost Pools Amount Purchasing $ 45,000 Handling materials 50,000 Production (cutting, milling, finishing) 130,000 Setting up machines 85,000 Inspecting Inventory control (raw materials and finished goods) 60,000 80,000 Utilities Total budget overhead costs 100,000 $550,000