PART IV ACTIVITY-BASED COSTING

Sophia Windows designs and builds custom windows for luxury homes. Most of the windows are custom made but occasionally the company does mass production on order. Its budgeted manufacturing overhead costs for the year 2020 are as follows:

Overhead Cost Pools Amount

Purchasing $ 26,000

Production (cutting, milling, finishing) 176,000

Setting up machines 65,000

Inspecting 35,000

Utilities 75,000

Total budget overhead costs $377,000

For the last three years, the company has been allocating overhead to products on the basis of machine hours. For the year 2020, 20,000 machine hours are budgeted.

The operations manager of Sophia recently directed her accountant to implement the activity-based costing system she has repeatedly proposed. The accountant and production foreman identified the following cost drivers and their usage for the previously budgeted overhead cost pools:

Overhead Cost Pools Activity Cost Drivers Total Activity

Purchasing Number of orders 80

Production (cutting, milling, finishing) Direct labor hours 16,000

Setting up machines Number of setups 250

Inspecting Number of inspections 1,250

Utilities Square feet occupied 15,000

During this month, the company received an order for 80 windows from a housing development contractor. The accountant prepared cost estimates for producing components for 80 windows to submit a contract price per window set to the contractor. The following data for the production of 80 windows is accumulated:

Direct materials $22,000

Direct labor $23,100

Machine hours 1,600

Direct labor hours 2,100

Number of purchase orders 8

Number of machine setups 15

Number of inspections 12

Number of square feet occupied 1,200

Instructions

(a) Compute the predetermined overhead rate using traditional costing with machine hours as the basis.

(b) Compute the manufacturing cost per window under traditional costing.

(c) Compute the manufacturing cost per window under the proposed activity-based costing system.