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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 $ 42,875 175 orders
Setting up production Number of production runs 152,000 80 runs
Handling materials Pounds of materials used 308,000 110,000 pounds
Machine depreciation and maintenance Machine-hours 264,000 12,000 hours
Performing quality control Number of inspections 55,200 40 inspections
Packing Number of units 125,000 500,000 units
Total estimated cost $ 947,075

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 62,000 23,000 8,000
Direct materials costs $ 38,000 $ 27,000 $ 16,000
Direct labor-hours 440 460 630
Number of orders 12 10 7
Number of production runs 3 4 7
Pounds of material 14,000 6,000 2,500
Machine-hours 560 140 100
Number of inspections 3 3 4
Units shipped 62,000 23,000 8,000

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 your answers 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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