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 Processing orders Setting up production Handling materials Machine depreciation and maintenance Performing quality control Packing Total estimated cost Recommended Cost Driver Number of orders Number of production runs Pounds of materials used Machine-hours Number of inspections Number of units Estimated Cost $ 46,000 176,000 392,000 266,000 45,500 92.000 $1,017,500 Estimated Cost Driver Activity 200 orders 110 runs 140,000 pounds 14,000 hours 35 inspections 460,000 units In addition, management estimated 7,800 direct labor-hours for year 2. Assume that the following cost driver volumes occurred in January, year 2: Institutional 61,000 $43,000 420 Standard 21,000 $26,000 Silver 9,000 $17,000 560 470 10 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 13,000 580 7,000 140 2,600 80 61,000 21,000 9,000 Actual labor costs were $16 per hour. Required: (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.) Rate per order Activity Processing orders Setting up production Handling materials Using machines Performing quality control Packing per run per pound per machine hour per inspection per unit (2) Compute a predetermined rate for year 2 using direct labor-hours as the allocation base. (Round your answer to 2 decimal places.) Predetermined rate per direct labor-hour 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.) Institutional $ 43,000 Standard $ 26,000 Silver 17,000 Total 86,000 $ $ Account Direct materials Direct labor Indirect costs Total cost $ 43,000 $ 26,000 $ 17,000 $ 86,000 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.) Institutional $ 43,000 Standard $ 26,000 Silver 17,000 Total 86,000 $ $ Account Direct materials Direct labor Indirect costs Processing orders Setting up production Handling materials Using machines Performing quality control Packing Total cost $ 43,000 $ 26,000 $ 17,000 $ 86,000
