Kitchen Supply, Inc. (KSI), manufactures three types of flatware: institutional, standard, and silver. It applies all indirect costs according to a predetermined rate based on direct labor-hours. A consultant recently suggested that the company switch to an activity-based costing system and prepared the following cost estimates for year 2 for the recommended cost drivers.

17 Kitchen Supply, Inc. (KSI), manufactures three types of flatware: institutional, standard, and silver. It applies all indirect costs according to a predetermined rate based on direct labor-hours. A consultant recently suggested that the company switch to an activity-based costing system and prepared the following cost estimates for year 2 for the recommended cost drivers 10 points Skipped Recommended Cost Driver Number of orders Number of production runs Pounds of materials used Estimated Cost $ 45,000 187,000 275,000 Estimated cost Driver Activity 200 orders 110 runs 110,000 pounds Activity Processing orders Setting up production Handling materials Machine depreciation and maintenance Performing quality control Packing Total estimated cost Machine-hours Number of inspections Number of units 308,000 63,000 110,000 $988,000 14,000 hours 50 inspections 440,000 units eBook Print In addition, management estimated 7,100 direct labor-hours for year 2 References Assume that the following cost driver volumes occurred in January, year 2. Institutional 62,000 $39, eee 440 13 Number of units produced Direct materials costs Direct labor-hours Number of orders Number of production runs Pounds of material Machine-hours Number of inspections Units shipped Standard 26,00 $2e, eee 440 9 2 7,eee 120 3 Silver 7,000 $15,000 630 6 5 2,600 60 3 7,000 13,00 610 3 62,000 26,000 Actual labor costs were $16 per hour. Required: a. (1) Compute a predetermined overhead rate for year 2 for each cost driver using the estimated costs and estimated cost driver units prepared by the consultant. (2) Compute a predetermined rate for year 2 using direct labor-hours as the allocation base. b. Compute the production costs for each product for January using direct labor-hours as the allocation base and the predetermined rate computed in requirement a(2). c. Compute the production costs for each product for January using the cost drivers recommended by the consultant and the predetermined rates computed in requirement a. (Note: Do not assume that total overhead applied to products in January will be the same for activity-based costing as it was for the labor-hour-based allocation.)