Problem - Kitchen Supply, Inc. (KSI), manufactures three types of flatware: institutional, standard, and silver. It applies all indirect costs according to a predetermined rate based on direct labor-hours. A consultant recently suggested that the company switch to an activity-based costing system and prepared the following cost estimates for year 2 for the recommended cost drivers.
|
Activity
|
Recommended
Cost Driver
|
Estimated
Cost
|
Estimated Cost
Driver Activity
|
|
Processing orders
|
Number of orders
|
$54,000
|
225
|
orders
|
|
Setting up production
|
Number of production runs
|
162,000
|
90
|
runs
|
|
Handling materials
|
Pounds of materials used
|
360,000
|
120,000
|
pounds
|
|
Machine depreciation and maintenance
|
Machine-hours
|
294,000
|
14,000
|
hours
|
|
Performing quality control
|
Number of inspections
|
62,100
|
45
|
inspections
|
|
Packing
|
Number of units
|
120,000
|
480,000
|
units
|
|
Total estimated cost
|
|
$1,052,100
|
|
|
In addition, management estimated 7,400 direct labor-hours for year 2. Assume that the following cost driver volumes occurred in January, year 2:
|
|
Institutional
|
Standard
|
Silver
|
|
Number of units produced
|
57,000
|
21,000
|
9,000
|
|
Direct materials costs
|
$38,000
|
$25,000
|
$17,000
|
|
Direct labor-hours
|
480
|
430
|
560
|
|
Number of orders
|
12
|
8
|
5
|
|
Number of production runs
|
3
|
4
|
6
|
|
Pounds of material
|
17,000
|
6,000
|
3,300
|
|
Machine-hours
|
600
|
120
|
80
|
|
Number of inspections
|
3
|
3
|
3
|
|
Units shipped
|
57,000
|
21,000
|
9,000
|
Actual labor costs were $14 per hour.
Required:
a. (1) Compute a predetermined overhead rate for year 2 for each cost driver using the estimated costs and estimated cost driver units prepared by the consultant.
(2) Compute a predetermined rate for year 2 using direct labor-hours as the allocation base. (Round your answer to 2 decimal places.)
b. Compute the production costs for each product for January using direct labor-hours as the allocation base and the predetermined rate computed in requirement a(2). (Do not round intermediate calculations.)
c. Compute the production costs for each product for January using the cost drivers recommended by the consultant and the predetermined rates computed in requirement a. (Note: Do not assume that total overhead applied to products in January will be the same for activity-based costing as it was for the labor-hour-based allocation.) (Do not round intermediate calculations.)