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 | $ | 52,875 | 225 | orders | |
| Setting up production | Number of production runs | 144,000 | 80 | runs | ||
| Handling materials | Pounds of materials used | 280,000 | 100,000 | pounds | ||
| Machine depreciation and maintenance | Machine-hours | 240,000 | 12,000 | hours | ||
| Performing quality control | Number of inspections | 55,600 | 40 | inspections | ||
| Packing | Number of units | 138,000 | 460,000 | units | ||
| Total estimated cost | $ | 910,475 | ||||
| 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 | Standard | Silver | |||||||
| Number of units produced | 57,000 | 27,000 | 8,000 | ||||||
| Direct materials costs | $ | 43,000 | $ | 23,000 | $ | 15,000 | |||
| Direct labor-hours | 480 | 420 | 560 | ||||||
| Number of orders | 13 | 10 | 6 | ||||||
| Number of production runs | 2 | 2 | 7 | ||||||
| Pounds of material | 16,000 | 5,000 | 3,000 | ||||||
| Machine-hours | 580 | 140 | 70 | ||||||
| Number of inspections | 3 | 3 | 3 | ||||||
| Units shipped | 57,000 | 27,000 | 8,000 | ||||||
| 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.) |
| (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). (Round "Indirect costs" to the nearest dollar.) |
| (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.) |
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Principles Of External Auditing
Authors: Brenda Porter, Jon Simon, David Hatherly
1st Edition
0471962120, 978-0471962120
