Thakin Stairs Co. designs and builds factory-made premium wooden stairways for homes. The manufactured stairway components (spindles, risers, hangers, hand rails)

permit installation of stairways of varying lengths and widths. All are of white oak wood.

Budgeted manufacturing overhead costs for the year 2014 are as follows.

Overhead Cost Pools Amount Purchasing $ 69,000 Handling materials 82,000 Production (cutting, milling, fi nishing) 210,000 Setting up machines 95,000 Inspecting 90,000 Inventory control (raw materials and fi nished goods) 126,000 Utilities 180,000 Total budgeted overhead costs $852,000 For the last 4 years, Thakin Stairs Co. has been charging overhead to products on the basis of machine hours. For the year 2014, 100,000 machine hours are budgeted.

Jeremy Nolan, owner-manager of Thakin Stairs Co., recently directed his accountant, Bill Seagren, to implement the activity-based costing system that he has repeatedly proposed.

At Jeremy Nolan’s request, Bill and the production foreman identify the following cost drivers and their usage for the previously budgeted overhead cost pools.

Expected Use of Activity Cost Pools Cost Drivers Cost Drivers Purchasing Number of orders 600 Handling materials Number of moves 8,000 Production (cutting, milling, fi nishing) Direct labor hours 100,000 Setting up machines Number of setups 1,250 Inspecting Number of inspections 6,000 Inventory control (raw materials and fi nished goods) Number of components 168,000 Utilities Square feet occupied 90,000 Steve Hannon, sales manager, has received an order for 250 stairways from Community Builders, Inc., a large housing development contractor. At Steve’s request, Bill prepares cost estimates for producing components for 250 stairways so Steve can submit a contract price per stairway to Community Builders. He accumulates the following data for the production of 250 stairways.

Direct materials $103,600 Direct labor $112,000 Machine hours 14,500 Direct labor hours 5,000 Number of purchase orders 60 Number of material moves 800 Number of machine setups 100 Number of inspections 450 Number of components 16,000 Number of square feet occupied 8,000.

Instructions

(a) Compute the predetermined overhead rate using traditional costing with machine hours as the basis.

(b) What is the manufacturing cost per stairway under traditional costing? (Round to the nearest cent.)

(c) What is the manufacturing cost per stairway under the proposed activity-based costing?
(Round to the nearest cent. Prepare all of the necessary schedules.)

(d) Which of the two costing systems is preferable in pricing decisions and why?AppendixLO1