Question

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 Purchasing Handling materials Production (cutting, milling, finishing) Setting up machines Inspecting Inventory control (raw materials and finished goods) Utilities Total budgeted overhead costs Amount $75,000 82,000 220,000 100,000 120,000 126,000 270,000 $993,000 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 Estimated Use of Cost Drivers Purchasing 600 Handling materials Production (cutting, milling, finishing) Setting up machines Inspecting Inventory control (raw materials and finished goods) Utilities Cost Drivers Number of orders Number of moves Direct labor hours Number of setups Number of inspections Number of components Square feet occupied 8,000 100,000 1,250 6,000 168,000 90,000 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. $104,200 $112,700 15,000 5,700 Direct materials Direct labor Machine hours Direct labor hours Number of purchase orders Number of material moves Number of machine setups Number of inspections Number of components Number of square feet occupied 800 100 450 16,000 8,000 Compute the predetermined overhead rate using traditional costing with machine hours as the basis. (Round answer to 2 decimal places, e.g. 12.25.)

Answer 1

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Shaker Stair's Co.
Answer a
Calculation of Predetermined OH Rate	Amount $	Note
Total Machine Hours	100,000.00	A
Total Manufacturing overhead	993,000.00	B
Predetermined OH Rate	9.93	C=B/A
Allocated OH for 250 stairways	Amount $
Total Machine Hours	15,000.00	D
Predetermined OH Rate	9.93	See C
Allocated OH	148,950.00	E=C*D
Cost of 250 stairways- Traditional costing	Amount $
Direct Materials	104,200.00	H
Direct Labor	112,700.00	G
Allocated OH per unit	148,950.00	See E
Product cost	365,850.00	I=H+G+E
Number of stairways	250.00	J
Cost per stairway	1,463.40	K=I/J
Calculation of ABC rates for overhead		L	M	N=L/M
Activity cost pool	Cost Driver	Cost	Use of Cost Drivers	ABC rates
Purchasing	Number of orders	75,000.00	600.00	125.00
Handling Materials	Number of moves	82,000.00	8,000.00	10.25
Production (cutting, milling, finishing)	Direct Labor Hours	220,000.00	100,000.00	2.20
Setting up machines	Number of setups	100,000.00	1,250.00	80.00
Inspecting	Number of inspections	120,000.00	6,000.00	20.00
Inventory Control	Number of components	126,000.00	168,000.00	0.75
Utilities	Square feet occupied	270,000.00	90,000.00	3.00
Total Cost assigned		993,000.00
Allocation table		See N	O	P=N*O	Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap
Activity cost pool	Activity Measure	ABC Rates	Activity used	Cost assigned
Purchasing	Number of orders	125.00	60.00	7,500.00
Handling Materials	Number of moves	10.25	800.00	8,200.00
Production (cutting, milling, finishing)	Direct Labor Hours	2.20	5,700.00	12,540.00
Setting up machines	Number of setups	80.00	100.00	8,000.00
Inspecting	Number of inspections	20.00	450.00	9,000.00
Inventory Control	Number of components	0.75	16,000.00	12,000.00
Utilities	Square feet occupied	3.00	8,000.00	24,000.00
Total Cost assigned				81,240.00	U
Product cost- ABC System	Short
Direct Materials	104,200.00	See H
Direct Labor	112,700.00	See G
Allocated OH per unit	81,240.00	See U
Product cost	298,140.00	V=H+G+U
Number of units	250.00	See J
Cost per stairway	1,192.56	W=V/J