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	$ 54,000	200 orders
Setting up production	Number of production runs	216,000	100 runs
Handling materials	Pounds of materials used	360,000	120,000 pounds
Machine depreciation and maintenance	Machine-hours	288,000	12,000 hours
Performing quality control	Number of inspections	72,000	45 inspections
Packing	Number of units	144,000	480,000 units
Total estimated cost		$1,134,000

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	60,000	24,000	9,000
Direct materials costs	$39,000	$24,000	$15,000
Direct labor-hours	450	450	600
Number of orders	12	9	6
Number of production runs	3	3	6
Pounds of material	15,000	6,000	3,000
Machine-hours	580	140	80
Number of inspections	3	3	3
Units shipped	60,000	24,000	9,000

Actual labor costs were $15 per hour.

Required

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. Also compute a predetermined rate for year 2 using direct labor-hours as the allocation base.

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).

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.)

Management has seen your numbers and wants an explanation for the discrepancy between the product costs using direct labor-hours as the allocation base and the product costs using activity-based costing. Write a brief response to management.

KITCHEN SUPPLY, INC Part a. Estimated Activity Cost Driver Costs Driver Units Rate Processing orders Setting up production Handling materials Using machines Performing quality control Packing Total estimated overhead Number of orders Number of runs Pounds Machine hours 200 orders S 54,000 216,000 100 runs 360,000120,000 pounds 288,000 72,000 144,000 S 1,134,000 12,000 hours Number of inspections 45 inspections Number of units 480,000 units Estimated activity Estimated allocation base Predetermined rate for direct labor-hour S 1,134,000 #0N101 Part b Production costs using direct labor hour Account Direct materials Direct labor Institutional Standard Silver Total Indirect costs Total cost Try again Try agan ry againt Part c. 4 Production costs using AB Account Institutional Standard Silver Total 7 Direct materials Direct labor 9 Indirect costs: Processing orders Setting up production Handling materials 3 Using machines 4 Performing quality control 5 Packing 6 Total cost