P4-38 Luxury Furniture designs and builds factory-made, premium, wood armoires for homes. All are of white oak. Its budgeted manufacturing overhead costs for the year 2014 are as follows. Purchasing Overhead Cost Pools Handling materials Production (cutting, milling, finishing) Setting up machines Assign overhead costs using traditional costing and ABC compare rests (LO 1, 4), AN Inspecting Inventory control (raw materials and finished goods) Utilities Total budgeted overhead costs Amount $ 45,000 50,000 130,000 85,000 60,000 80,000 100,000 $550,000 For the last 4 years, Luxury Furniture has been charging overhead to products on the basis of materials cost. For the year 2014, materials cost of $500,000 were budgeted. Jim Brigham, owner-manager of Luxury Furniture, recently directed his accountant, Bob Borke, to implement the activity-based costing system that he has repeatedly pro- posed. At Jim Brigham's request, Bob and the production foreman identify the following cost drivers and their usage for the previously budgeted overhead cost pools. Expected Use of Overhead Cost Pools Purchasing Handling materials Production (cutting, milling, finishing) Setting up machines Inspecting Inventory control (raw materials and finished goods) Activity Cost Drivers Cost Drivers Number of orders 500 Number of moves 5,000 Direct labor hours 65,000 Number of setups 1,000 Number of inspections 4,000 Number of components 40,000 Square feet occupied 50,000 Utilities Debbie Steiner, sales manager, has received an order for 12 luxury armoires from Thom's Interior Design. At Debbie's request, Bob prepares cost estimates for producing 12 armoires so Debbie can submit a contract price per armoire to Thom's. He accumulates the following data for the production of 12 armoires. Direct materials Direct labor $5,200 $3,500 Direct labor hours Number of purchase orders Number of material moves 200 3 32 Number of machine setups 4 Number of inspections 20 Number of components 640 Number of square feet occupied 320 188 4 Activity-Based Costing (b) Costarmoire 51,201.67 (c) Costlarmoire $1,020.83 Instructions (a) Compute the predetermined overhead rate using traditional costing with materials cost as the basis. (b) What is the manufacturing cost per armoire under traditional costing? (c) What is the manufacturing cost per armoire under the proposed activity-based cost- ing? (Prepare all of the necessary schedules.) (d) Which of the two costing systems is preferable in pricing decisions and why?