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. Activity Setting up production Processing orders Handling materials Using machines Providing quality management Packing and shipping Recommended Cost Driver Number of production runs Number of orders Pounds of materials Machine-hours Number of inspections Units shipped Estimated Cost $ 30,000 52,000 14,000 60,000 56,000 40,000 $252,000 Estimated Cost Driver Units 100 runs 200 orders 7,000 pounds 10.000 hours 40 Inspections 20.000 units 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 900 500 400 Direct materials costs $5,000 $3,000 $2,000 Direct labor-hours 100 140 120 Number of orders 8 9 5 Number of production runs 2 4 8 Pounds of material 400 800 200 Machine-hours 500 200 300 Number of inspections 2 3 Units shipped 900 500 300 2 Direct labor costs were $20 per hour. 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. (Round your answers to 2 decimal places.) Allocation Rate Activity Setting up production Processing orders Handling materials Using machines Performing quality management Packing & shipping Direct labor hour rate per run per order per lb. per hour per insp. per unit 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. (Do not round intermediate calculations.) Short 5000 Medium 3,000 $ Tall 2,000 $ Direct materials Direct labor Overhead Total costs 5,000 $ 3,000 $ 2,000 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.) (Do not round intermediate calculations.) Short Medium 5,000 S 3,000 $ Tall 2,000 $ Direct materials Direct labor Setting up production Processing orders Handling materials Using machines Performing quality management Shipping Total costs $ 5,000 $ 3,000 $ 2.000
