Problem 5-47 Straightforward ABC calculations (LO 5-1, 5-2, 5-4, 5-5) [The following information applies to the questions displayed below.] Kitchen King's Toledo plant manufactures three product lines, all multi-burner, ceramic cook tops. The plant's three product models are the Regular (REG), the Advanced (ADV), and the Gourmet (GMT). Until recently, the plant used a job-order product-costing system, with manufacturing overhead applied on the basis of direct-labor hours. The following table displays the basic data upon which the traditional costing system was based. Planned annual production: Volume in units Production runs Direct material Direct labor: REG ADV GHT 5,000 4,000 40 runs @ 125 units 1,000 $129 $171 40 runs 100 units $151 $209 20 runs 50 units 5203 (not including setup) $247 (9 hrs. @$19/hr.) (11 hrs. @$19/hr.) (13 hrs. $19/hr.) Machine hours (MH) per product unit Total MH consumed by product line in a year 10 MH 50,000 (10 MH x 5,000) 12 MH 48,000 27 PH 17,000 (12 MH 4,000) (17 MH 1,000) C Kitchen King's pricing policy is to set a target price for each product equal to 130 percent of the full product cost. Due to price competition from other appliance manufacturers, REG units were selling at $525, and ADV units were selling for $628. These prices were somewhat below the firm's target prices. However, these results were partially offset by greater-than-expected profits on the GMT product line. Management had raised the price on the GMT model to $800, which was higher than the original target price. Even at this price, Kitchen King's customers did not seem to hesitate to place orders, Moreover, the company's competitors did not mount a challenge in the market for the GMT product line. Nevertheless, concern continued to mount in Toledo about the difficulty in the REG and ADV markets. After all, these were the plant's bread-and-butter products, with projected annual sales of 5,000 REG units and 4,000 ADV units. Kitchen King's director of cost management, Angela Ramirez, had been thinking for some time about a refinement in the Toledo plant's product-costing system. Ramirez wondered if the traditional, volume-based system was providing management with accurate data about product costs. She had read about activity-based costing, and wondered if ABC would be an improvement to the plant's product-costing system. After some discussion, an ABC proposal was made to the company's top management, and approval was obtained. The data collected for the new ABC system is displayed in the following table. Cost Driver Activity Machine related Activity Cost Pool $310,500 Product Quantity for Cost Driver Machine Hours Line Product Line REG 50,000 ADV 48,000 GMT 17,000 Material handling 52,500 Production Runs REG 40 ADV 40 GMT 20 Total 100 Purchasing 75,000 Purchase Orders REG 100 ADV 96 GMT 104 Total 300 Setup 85,000 Production Runs REG 40 ADV 40 GMT 20 Total 100 Inspection 27,500 Inspection Hours REG 400 ADV 400 N GMT 300 Total 1,100 Shipping 66,000 Shipments REG 500 ADV 400 GMT 200 Total 1,100 Engineering 32,500 Engineering Hours REG 250 ADV 200 GMT 200 T-L-? cen Total 1,100 Engineering 32,500 Engineering Hours REG 250 ADV 200 GMT 200 Total 650 Facility 575,000 Machine Hours REG 50,000 ADV 48,000 GMT 17,000 Total 115,000 Problem 5-47 Part 1 Required: 1. Show how the company's overhead rate of $12 per direct-labor hour was calculated.