PART 2-CALCULATION expensive Many of the kitchen cabinet and counter arrangements are customer made, but occasionally the Earnest Cabinet Company Ltd designs and builds upscale kitchen cabinets for luxury homes. entity does mass production on order, Its budgeted manufacturing overhead costs for the year 2020 are as follows: Overhead cost pools Purchasing Handling materials Production (cutting, milling, finishing) O Setting up machines Inspecting Inventory control (raw materials and finished goods) O Power Total budgeted overhead costs Budgeted overhead $ 114 400 $ 164 320 $ 400 000 $ 174 480 $ 184 800 $ 252 000 $360 000 $1 650 000 For the last 3 years, Earnest Cabinet Company Ltd has been charging overhead to products on the basis of machine hours. For the year 2020, 100 000 machine hours are budgeted. Ron Adams, Managing Director of Earnest Cabinet, recently directed his accountant, John Clarke, to implement the activity-based costing system he has repeatedly proposed. At Ron's request, John and the production foreman identify the following cost drivers and their usage for the previously budgeted overhead cost pools: 650 Overhead cost pools Activity cost drivers Total drivers Purchasing Number of orders Handling materials Number of moves 8 000 Production (cutting, milling, finishing) Direct labour hours 100 000 Setting up machines Number of set-ups 1 200 Inspecting Number of inspections 6 000 Inventory control (raw materials and finished goods) Number of components 36 000 Power Square metres occupied 90 000 Larry Smith, sales manager, has received an order for 50 kitchen cabinet arrangements from Metro Builders Pty Limited. At Larry's request, John prepares cost estimates for producing components for 50 cabinet arrangements so Larry can submit a contract price per kitchen arrangement to Metro Builders Pty Limited. He accumulates the following data for the production of 50 kitchen cabinet arrangements. 10 Cutting department 40 hours et labour ours equired: 1. Calculate the manufacturing overhead cost of the A Pramie ust 1. (a) a predetermined plantwide rate based on direct labour hot 07 AM verhead rate $180,000/ 45,000 = $ stof A Frame 5 dir: ep 1: te-determined overhead rate a budgeted manufacturing overhead / Budgeted cost driver d manufacturing overhead = $180,000 est driver (direct labour hours) = 45,000 Direct materials Direct labour Machine hours Direct labour hours *Number of purchase orders Number of material moves Number of machine set-ups Number of inspections Number of components (cabinets and accessories) Number of square metres occupied $180 000 $200 000 15 000 12 000 50 800 100 450 3 000 8 000 Required 1. Calculate the predetermined overhead rate using traditional costing with machine hours as the basis. (Round to the nearest cent.) (1 mark) 2. What is the manufacturing cost per complete kitchen arrangement under traditional costing? (4 marks) 3. What is the manufacturing cost per kitchen arrangement under the proposed activity- based costing? (Prepare all of the necessary schedules.) (8 marks) 4. Which of the two costing systems is preferable in pricing decisions? Explain
