Shaker Stairs Co. designs and builds factory-made premium wooden stairways for homes. The manufactured stairway components (spindles, risers, hangers, hand rails) permit installation of stairways of varying lengths and widths. All are of white oak wood. Budgeted manufacturing overhead costs for the year 2020 are as follows.

Overhead Cost Pools

Amount

Purchasing$69,000

Handling materials82,000

Production (cutting, milling, finishing)210,000

Setting up machines95,000

Inspecting90,000

Inventory control (raw materials and finished goods)126,000

Utilities180,000

Total budgeted overhead costs$852,000

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 previously budgeted overhead cost pools.

Activity Cost Pools

Cost Drivers

Estimated Use of

Cost Drivers

PurchasingNumber of orders600Handling materialsNumber of moves8,000Production (cutting, milling, finishing)Direct labor hours100,000Setting up machinesNumber of setups1,250InspectingNumber of inspections6,000Inventory control (raw materials and finished goods)Number of components168,000UtilitiesSquare feet occupied90,000

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 producing 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.

Direct materials$103,600Direct labor$112,000Machine hours14,500Direct labor hours5,000Number of purchase orders60Number of material moves800Number of machine setups100Number of inspections450Number of components16,000Number of square feet occupied8,000

Traditional costingPredetermined overhead rate$8.68per machine hour

Activity

Overhead Rate

Purchasing$125.00

per orderHandling materials$10.25

per moveProduction$2.10

per D/L hourSetting up machines$84.00

per setupInspecting$15.00

per inspectionInventory control$0.75

per componentUtilities$2.00

per sq. ft.

Which of the two costing systems (traditional costing or activity-based costing system) is preferable in pricing decisions and why?