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 | $ | 43,000 | 200 | orders | |
Setting up production | Number of production runs | 153,000 | 90 | runs | ||
Handling materials | Pounds of materials used | 300,000 | 120,000 | pounds | ||
Machine depreciation and maintenance | Machine-hours | 216,000 | 12,000 | hours | ||
Performing quality control | Number of inspections | 75,900 | 55 | inspections | ||
Packing | Number of units | 104,000 | 520,000 | units | ||
Total estimated cost | $ | 891,900 | ||||
In addition, management estimated 7,600 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 | 59,000 | 23,000 | 10,000 | ||||||
Direct materials costs | $ | 39,000 | $ | 21,000 | $ | 17,000 | |||
Direct labor-hours | 500 | 410 | 620 | ||||||
Number of orders | 12 | 7 | 7 | ||||||
Number of production runs | 3 | 3 | 6 | ||||||
Pounds of material | 16,000 | 7,000 | 3,100 | ||||||
Machine-hours | 610 | 140 | 80 | ||||||
Number of inspections | 3 | 4 | 3 | ||||||
Units shipped | 59,000 | 23,000 | 10,000 | ||||||
Actual labor costs were $14 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 your answers to 2 decimal places.) |
(b) | Compute a predetermined rate for year 2 using direct labor-hours as the allocation base. (Round your answer to 2 decimal places.) |
(c) | 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). (Round "Indirect costs" to the nearest dollar.) |
(d) | 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.) |
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