P4.3A (LO 1, 2), AN Writing Shaker Stairs Co. designs and builds factory-made premium wooden stairways for homes. The manufactured stairway components (spindles, risers, hangers, hand rails) per- mit installation of stairways of varying lengths and widths. All are of white oak wood. Budgeted manu- facturing overhead costs for the year 2020 are as follows. Assign overhead costs using traditional costing and ABC, compare results. Amount Overhead Cost Pools Purchasing Handling materials Production (cutting, milling, finishing) Setting up machines Inspecting Inventory control (raw materials and finished goods) Utilities Total budgeted overhead costs $ 75,000 82,000 210,000 105,000 90,000 126,000 180,000 $868,000 For the last 4 years, Shaker Stairs Co. has been charging overhead to products on the basis of machine hours. For the year 2020, 100,000 machine hours are budgeted. Jeremy Nolan, owner-manager of Shaker Stairs Co., recently directed his accountant, Bill Seagren, to implement the activity-based costing system that he has repeatedly proposed. At Jeremy Nolan's request, Bill and the production foreman identify the following cost drivers and their usage for the pre- viously budgeted overhead cost pools. Activity Cost Pools Purchasing Handling materials Production (cutting, milling, finishing) Setting up machines Inspecting Inventory control (raw materials and finished goods) Utilities Cost Drivers Number of orders Number of moves Direct labor hours Number of setups Number of inspections Estimated Use of Cost Drivers 600 8,000 100,000 1,250 6,000 Number of components Square feet occupied 168,000 90,000 Steve Hannon, sales manager, has received an order for 250 stairways from Community Builders, Inc., a large housing development contractor. At Steve's request, Bill prepares cost estimates for pro- ducing components for 250 stairways so Steve can submit a contract price per stairway to Community Builders. He accumulates the following data for the production of 250 stairways. $103,600 $112,000 14,500 5,000 60 Direct materials Direct labor Machine hours Direct labor hours Number of purchase orders Number of material moves Number of machine setups Number of inspections Number of components Number of square feet occupied 800 100 450 16,000 8,000 b. Cost/stairway $1,365.84 c. Cost/stairway $1,139.80 Instructions a. Compute the predetermined overhead rate using traditional costing with machine hours as the basis. b. What is the manufacturing cost per stairway under traditional costing? (Round to the nearest cent.) c. What is the manufacturing cost per stairway under the proposed activity-based costing? (Round to the nearest cent. Prepare all of the necessary schedules.) d. Which of the two costing systems is preferable in pricing decisions and why
