Question

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	$	42,000		175	orders
Setting up production	Number of production runs		190,000		100	runs
Handling materials	Pounds of materials used		300,000		120,000	pounds
Machine depreciation and maintenance	Machine-hours		220,000		11,000	hours
Performing quality control	Number of inspections		44,800		35	inspections
Packing	Number of units		88,000		440,000	units
Total estimated cost		$	884,800

In addition, management estimated 7,200 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		62,000			24,000			8,000
Direct materials costs	$	36,000		$	26,000		$	17,000
Direct labor-hours		480			440			620
Number of orders		13			9			6
Number of production runs		4			2			6
Pounds of material		17,000			7,000			3,200
Machine-hours		550			160			100
Number of inspections		3			3			3
Units shipped		62,000			24,000			8,000

Actual labor costs were $16 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.

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).

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.)

Complete this question by entering your answers in the tabs below. Req A1 Req A2 Req B Reqc 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. (Round your answers to 2 decimal places.) Activity Processing orders Setting up production Handling materials Using machines Performing quality control Packing Rate per order per run per pound per machine hour per inspection per unit

Answer 1

a)				Estimated	Driver	rate
1)				cost (a)	(b)	c=a/b
	processing orders			42,000	175	240	per order
	Setting up production			190,000	100	1900	per run
	handling materials			300,000	120,000	2.5	per pound
	using machines			220,000	11,000	20	per mh
	performing quality control			44,800	35	1280	per inspection
	packing			88,000	440,000	0.2	per unit
	Estimated activity				884,800
	estimated allocation base				7,200
	predetermined rate for direct labor				122.89
	production cost using direct labor hours
			institutional	standard	Silver	total
b)	Account
	Direct materials		36000	26000	17000	79000
	direct labor		7680	7040	9920	24640
	indirect costs		58987	54071	76191	189249
	total cost		102667	87111	103111	292889
		direct labor = DLH*$16 per hour
		indirect cost = dLH*$122.89
c)			institutional	standard	Silver	total
	Account
	Direct materials		36000	26000	17000	79000
	direct labor		7680	7040	9920	24640
	Indirect costs
	processing orders		3120	2160	1440	6720
	Setting up production		7600	3,800	11400	22800
	handling materials		42500	17500	8000	68000
	using machines		11000	3200	2000	16200
	performing quality control		3840	3,840	3840	11520
	packing		12400	4800	1600	18800
	total cost		124140	68340	55200	247680