Question
The given scenario is about Fisher Fixtures, a company that manufactures three types of lighting fixtures: Silver, Gold, and Platinum. Currently, the company applies all
The given scenario is about Fisher Fixtures, a company that manufactures three types of lighting fixtures: Silver, Gold, and Platinum. Currently, the company applies all indirect costs based on direct labor-hours. However, the plant controller has recommended switching to an activity-based costing system. The controller's staff has provided cost estimates for next year (year 2) for the recommended cost drivers.
The estimated cost drivers for next year are as follows:
1. Purchasing material: - Recommended Cost Driver: Number of purchase orders - Estimated Cost: $124,800 - Estimated Cost Driver Activity: 240 purchase orders
2. Receiving material: - Recommended Cost Driver: Direct materials cost - Estimated Cost: $230,400 - Estimated Cost Driver Activity: $2,880,000 direct materials cost
3. Setting up equipment: - Recommended Cost Driver: Number of production runs - Estimated Cost: $224,040 - Estimated Cost Driver Activity: 120 runs
4. Machine depreciation and maintenance: - Recommended Cost Driver: Machine-hours - Estimated Cost: $77,310 - Estimated Cost Driver Activity: 15,462 machine-hours
5. Ensuring regulatory compliance: - Recommended Cost Driver: Number of inspections - Estimated Cost: $445,500 - Estimated Cost Driver Activity: 54 inspections
6. Shipping: - Recommended Cost Driver: Number of units shipped - Estimated Cost: $1,069,200 - Estimated Cost Driver Activity: 594,000 units
The total estimated cost for these cost drivers is $2,171,250.
In addition, management has estimated 45,000 direct labor-hours for year 2.
The given data also provides cost-driver volumes for January, year 2, for each product model:
1. Silver: - Number of units produced: 32,000 - Direct labor-hours: 2,000 - Number of purchase orders: 7 - Direct materials cost: $97,500 - Number of production runs: 2 - Machine-hours: 700 - Number of inspections: 0 - Units shipped: 32,000
2. Gold: - Number of units produced: 10,000 - Direct labor-hours: 1,200 - Number of purchase orders: 6 - Direct materials cost: $60,000 - Number of production runs: 3 - Machine-hours: 175 - Number of inspections: 2 - Units shipped: 10,000
3. Platinum: - Number of units produced: 3,000 - Direct labor-hours: 400 - Number of purchase orders: 3 - Direct materials cost: $37,500 - Number of production runs: 5 - Machine-hours: 100 - Number of inspections: 3 - Units shipped: 3,000
The labor costs are based on a contractual rate of $25 per hour.
The required calculations are:
a) Compute the predetermined rate for year 2 for use in the current product-costing system using direct labor-hours as the allocation base.
b) Compute the per-unit production costs for each model for January using direct labor-hours as the allocation base and the predetermined rate computed in requirement (a).
c) Compute the predetermined overhead rate for year 2 for each cost driver using the estimated costs and estimated cost driver units prepared by the controller's staff to be used in an ABC system.
d) Compute the per-unit production costs for each product for January using the cost drivers recommended by the consultant and the predetermined rates computed in requirement (c).
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