QUESTION ONE

You have been employed as the new accountant for Tim Co. The company designs wooden tables. The budgeted manufacturing overhead costs for the year 2015 are as follows.

Overhead Cost Pools	Amount
Purchasing	80,000
Handling materials	96,000
Production	240,000
Setting up machines	102,000
Inspecting	90,000
Inventory control	144,000
Utilities	182,000
Total budgeted overhead cost	934,000

The previous accountant has been charging overhead to products on the basis of labour hours. The budgeted labour hours for 2015 are 144,000. The owner of Tim Co., ask you to implement the activity-based costing system. At the owners request the production foreman gave you information on a number of cost drivers and their usage from the previously budgeted overhead cost pools.

Activity Cost Pools	Cost Drivers	Expected Use of Cost Drivers
Purchasing	Number of orders	550
Handling materials	Number of moves	8,200
Production	Machine hours	120,000
Setting up machines	Number of setups	1,500
Inspecting	Number of inspections	4,440
Inventory control	Number of components	180,000
Utilities	Square feet occupied	90,000

The sales department has received an order of 400 tables from large company for their new offices. The production foreman prepared cost estimates for producing the 400 tables so the sales department can submit a contract price for each table to the company. The following data for the production of 400 tables are provided:

Direct materials	104,000
Direct labour	120,000
Machine hours	15,000
Direct labour hours	6,000
Number of purchase orders	60
Number of material moves	800
Number of machine setups	70
Number of inspections	500
Number of components	14,000
Number of square feet occupied	8,000

Instructions:

i. Compute the predetermined overhead rate using absorption costing with labour hours as the basis. (10 marks)

ii. What is the total cost per table under the absorption costing? (10 marks)

iii. What is the total cost per table under the proposed activity-based costing? (25 marks)

iv. Which of the two costing systems is preferable in pricing decisions and why? (5 marks)