College Supply Company (CSC) makes three types of drinking glasses: short, medium, and tall. It presently applies overhead using a predetermined rate based on direct labor- hours. A group of company employees recommended that CSC switch to activity based costing and identified the following activities, cost drivers, estimated costs, and estimated cost driver units for Year 5 for each activity center. Recommended Estimated Estimated Cost Activity Cost Driver Cost Driver Units Number of production Setting up production runs $ 30,000 100 runs Number of Processing orders 48,000 200 orders orders Pounds of Handling materials 14,000 7,000 pounds materials Machine- Using machines hours 70,000 10,000 hours Providing quality Number of management inspections 48,000 40 inspections Units Packing and shipping shipped 44,000 22,000 units $254,000 Required: a. Compute a predetermined overhead rate for year 5 for each cost driver recommended by the employees. Also compute a predetermined rate using direct labor-hours as the allocation base. Allocation Activity Rate Setting up production 300 per run Processing Orders 240 per order Handling Materials 2 2 per lb Using Machines 7 per hour Performing Quality Mans 1200 per insp Packing & Shipping 2 per unit Direct labor hour Rate 127 per hour b. Compute the production costs for each product for February using direct labor-hours as the allocation base and the predetermined rate computed in requirement a Short Medium Tall Direct Materials 3000 2000 1500 Direct Labor Overhead Total Cost In addition, management estimated 2,000 direct labor-hours for year 5. Assume that the following cost driver volumes occurred in February, year 5. Short Medium Tall Number of units produced 1,100 500 400 Direct materials costs $3,000 $2,000 $1,500 Direct labor-hours 90 120 110 Number of orders 7 4 Number of production runs 2 4 Pounds of material 500 800 100 Machine-hours 600 400 400 Number of inspections 2 1 2 Units shipped 1,100 500 300 c. Compute the production costs for each product for February using the cost drivers recommended by the employees and the predetermined rates computed in requirement a (Note: Do not assume that total overhead applied to products in February will be the same for activity-based costing as it was for the labor-hour-based allocation.) Short Medium Tall Direct materials 3000 2000 1500 Direct Labor Setting up Production Processing Orders Handling Materials Using Machines Performing Quality Mans Shipping Total Cost Direct labor costs were $18 per hour
