Thakin 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 2014 are as follows.
Overhead Cost Pools Amount
Purchasing ..................... $ 69,000
Handling materials ................. 82,000
Production (cutting, milling, finishing) .......... 210,000
Setting up machines ................ 95,000
Inspecting .................... 90,000
Inventory control (raw materials and finished goods) ..... 126,000
Utilities ..................... 180,000
Total budgeted overhead costs ............. . $852,000
For the last 4 years, Thakin Stairs Co. has been charging overhead to products on the basis of machine hours. For the year 2014, 100,000 machine hours are budgeted. Jeremy Nolan, owner-manager of Thakin 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.

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 ............. $103,600
Direct labor ............. $112,000
Machine hours ............ 14,500
Direct labor hours ............ 5,000
Number of purchase orders ....... 60
Number of material moves ....... 800
Number of machine setups ....... 100
Number of inspections ......... 450
Number of components ........ 16,000
Number of square feet occupied ...... 8,000
Instructions
(a) Compute the predetermined overhead rate using traditional costing with machine hours as the basis.
(b) What is the manufacturing cost per stairway under traditional costing? (Round to the nearest cent.)
(c) What is the manufacturing cost per stairway under the proposed activity-based costing? (Round to the nearest cent. Prepare all of the necessary schedules.)
(d) Which of the two costing systems is preferable in pricing decisions andwhy?

Transcribed Image Text:

Expected Use of Cost Drivers Activity Cost Pools Cost Drivers Purchasing Handling materials Production (cutting, milling, finishing) Setting up machines Inspecting Inventory control (raw materials Number of orders Number of moves Direct labor hours Number of setups Number of inspections 600 8,000 100,000 1,250 6,000 and finished goods) Utilities Number of components Square feet occupied 168,000 90,000