Question
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
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.
Activity Recommended Cost Driver Estimated Cost Estimated Cost Driver Activity
Processing orders Number of orders $ 54,000 200 orders
Setting up production Number of production runs 216,000 100 runs
Handling materials Pounds of materials used 360,000 120,000 pounds
Machine depreciation and maintenance Machine-hours 288,000 12,000 hours
Performing quality control Number of inspections 72,000 45 inspections
Packing Number of units 144,000 480,000 units
Total estimated cost $ 1,134,000
In addition, management estimated 7,500 direct labor-hours for year
2. Assume that the following cost driver volumes occurred in January, year 2:
Institutional Standard Silver
Number of units produced 60,000 24,000 9,000
Direct materials costs $ 39,000 $ 24,000 $ 15,000
Direct labor-hours 450 450 600
Number of orders 12 9 6
Number of production runs 3 3 6
Pounds of material 15,000 6,000 3,000
Machine-hours 580 140 80
Number of inspections 3 3 3
Units shipped 60,000 24,000 9,000
Actual labor costs were $15 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. (Round "Packing" answer to 2 decimal places.)
(2) Compute a predetermined rate for year 2 using direct labor-hours as the allocation base. (Round your answer to 2 decimal places.
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). (Do not round intermediate calculations.)
(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.) (Do not round intermediate calculations.)
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