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 $ 39,375 128,000 300,000 198,000 60,300 94,000 $819,675 Estimated Cost Driver Activity 175 orders 80 runs 120.000 pounds 11,000 hours 45 inspections 470,000 units In addition, management estimated 8,000 direct labor-hours for year 2 Assume that the following cost driver volumes occurred in January, year 2: 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 Institutional 59.000 $40,000 440 12 3 17,000 590 3 59,000 Standard 27,000 $24,000 440 9 3 7,000 150 3 27,000 Silver 9,000 $13,000 600 5 6 3,200 80 3 9,000 Actual labor costs were $15 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.) Activity Processing orders Setting up production Handling materials Using machines Performing quality control Packing Rate per order 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.) Total Institutional Standard $ 40,000 $ 24,000 $ Silver 13,000 $ 77,000 Account Direct materials Direct labor Indirect costs Total cost 0 0 $ 40,000 $ 24,000 $ 13,000 $ 77,000 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 Standard $ 24,000 $ Silver 13,000 $ Total 77,000 $ 40,000 0 0 Account Direct materials Direct labor Indirect costs Processing orders Setting up production Handling materials Using machines Performing quality control Packing Total cost 0 0 0 0 0 $ 40,000 $ 24,000 $ 13,000 $ 77,000
