Kitchen Kings Toledo plant manufactures three product lines, all multi-burner, ceramic cook tops. The plants three product models are the Regular (REG), the Advanced (ADV), and the Gourmet (GMT). Until recently, the plant used a job-order product-costing system, with manufacturing overhead applied on the basis of direct-labor hours. The following table displays the basic data upon which the traditional costing system was based.

	REG	ADV	GMT
Planned annual production: Volume in units	5,000	4,000	1,000
Production runs	40 runs of 125 units	40 runs of 100 units	20 runs of 50 units
Direct material	$129	$151	$203
Direct labor: (not including setup)	$171 (9 hrs. @ $19 per hr.)	$209 (11 hrs. @ $19 per hr.)	$247 (13 hrs. @ $19 per hr.)
Machine hours (MH) per product unit	10 MH	12 MH	17 MH
Total machine hours consumed by product line in a year	50,000 (10 MH 5,000)	48,000 (12 MH 4,000)	17,000 (17 MH 1,000)

The annual budgeted overhead is $1,224,000, and the companys predetermined overhead rate is $12 per direct-labor hour. The product costs for the three product models, as reported under the plants traditional costing system, are shown in the following table.

		REG			ADV			GMT
Direct material		$129.00			$151.00			$203.00
Direct labor (not including set-up time)		171.00	(9 hr. @ $19)		209.00	(11 hr. @ $19)		247.00	(13 hr. @ $19)
Manufacturing overhead		108.00	(9 hr. @ $12)		132.00	(11 hr. @ $12)		156.00	(13 hr. @ $12)
Total		$408.00			$492.00			$606.00

Kitchen Kings pricing policy is to set a target price for each product equal to 130 percent of the full product cost. Due to price competition from other appliance manufacturers, REG units were selling at $525, and ADV units were selling for $628. These prices were somewhat below the firms target prices. However, these results were partially offset by greater-than-expected profits on the GMT product line. Management had raised the price on the GMT model to $800, which was higher than the original target price. Even at this price, Kitchen Kings customers did not seem to hesitate to place orders, Moreover, the companys competitors did not mount a challenge in the market for the GMT product line. Nevertheless, concern continued to mount in Toledo about the difficulty in the REG and ADV markets. After all, these were the plants bread-and-butter products, with projected annual sales of 5,000 REG units and 4,000 ADV units.

Kitchen Kings director of cost management, Angela Ramirez, had been thinking for some time about a refinement in the Toledo plants product-costing system. Ramirez wondered if the traditional, volume-based system was providing management with accurate data about product costs. She had read about activity-based costing, and wondered if ABC would be an improvement to the plants product-costing system. After some discussion, an ABC proposal was made to the companys top management, and approval was obtained. The data collected for the new ABC system is displayed in the following table.

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Activity	Activity Cost Pool	Cost Driver	Product Line	Cost Driver Quantity for Product Line
Machine related	$310,500	Machine	REG	50,000
		Hours	ADV	48,000
			GMT	17,000
			Total	115,000
Material handling	52,500	Production	REG	40
		Runs	ADV	40
			GMT	20
			Total	100
Purchasing	75,000	Purchase	REG	100
		Orders	ADV	96
			GMT	104
			Total	300
Setup	85,000	Production	REG	40
		Runs	ADV	40
			GMT	20
			Total	100
Inspection	27,500	Inspection	REG	400
		Hours	ADV	400
			GMT	300
			Total	1,100
Shipping	66,000	Shipments	REG	500
			ADV	400
			GMT	200
			Total	1,100
Engineering	32,500	Engineering	REG	250
		Hours	ADV	200
			GMT	200
			Total	650
Facility	575,000	Machine	REG	50,000
		Hours	ADV	48,000
			GMT	17,000
			Total	115,000

Required:

Show how the companys overhead rate of $12 per direct-labor hour was calculated.

Complete an activity-based costing

2. Machine-related cost, REG line: $135,000

analysis for Kitchen Kings three product lines. Display the results of your ABC analysis in a table similar to Exhibit 57 in the text.

Prepare a table similar to Exhibit 58, which computes the new product cost for each product line under ABC

3. Total cost per unit, under ABC, GMT line: $663.90

.

Prepare a table similar to Exhibit 59, which compares the overhead cost, total product cost, and target price for each product line under the two alternative costing systems.

Was each of Kitchen Kings three product lines overcosted

5. Cost distortion per unit, ADV line: overcosted by $8.85

or undercosted? By how much per unit?

Build a spreadsheet: Construct an Excel spreadsheet to solve requirement (2) above. Show how the solution would change if the machine-related cost pool was $621,000, and the facility cost pool was $1,150,000.