Question

CALCULATOR PRINTER VERSION BACK NEXT Problem 17-3A (Part Level Submission) Shaker Stairs Co. designs and builds factory-made premium wooden stairways for homes. The manufactured stairway components (spindles, risers, hangers, handrais) permit installation of stairways of varying lengths and widths. All are of white oak wood. Budgeted manufacturing overhead costs for the year 2017 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 $74,400 82,640 216,000 96,250 96,000 131,040 360,000 $1,056,330 For the last 4 years, Shaker Stairs Co. has been charging overhead to products on the basis of machine hours. For the year 2017, 100,000 machine hours are budgeted. Jeremy Nolan, owner-manager of Shaker Stairs Co., recently directed his accountantsSeagren, 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 Expected Use of Cost Drivers Activity Cost Pools Purchasing Handing materials Production (cutting, miling, finishing) Setting up machines Inspecting Cost Drivers Number of orders Number of moves Direct labor hours Number of setups Number of inspection 1.000 100 000 1.250 40 PM

Answer 1

a. Predetermined overhead rate

In this example, Predetermined overhead rate is calculated based on machine hours.

Predetermined overhead rate = Budgeted total overhead/Budgeted machine hours

Predetermined overhead rate = 1,056,330/100,000 = $10.56 per hour

b. Manufacturing cost per stairway under traditional cosing

We have to first calculate total cost of 250 stairways. For this, we need to allocate the overheads based on machine hour rate calculated above.

Particulars Amount ($) 104,400 112,700 Direct materials Direct labour Manufacturing overheads (15,300 machine hours*$10.56 per hour) Total cost of 250 stairways - Units Manufacturing cost per stairway 161,568 378,668 250 1,514.67

(c1) Activity based overhead rate

To calculate the activity based overhead rate, we need to divide the total cost of the activity pools by the estimated use of cost drivers.

(c2) Total overheads assigned under ABC

Overhead cost pools Purchasing Handling materials Production Setting up machine Inspecting Inventory control Utilities Total cost 74,400 82,640 216,000 96,250 96,000 131,040 360,000 Use of cost drivers Overhead rate 600 124.00 8,000 10.33 100,000 2.16 1,250 77.00 6,000 16.00 168,000 0.78 90,000 4.00

To calculate total overheads assigned under ABC, we need to multiply the activity usage for 250 stairways of each activity pool by the activity overhead rate calculated in (c1) above.

Overhead cost pools Purchasing Handling materials Production Setting up machine Inspecting Inventory control Utilities Total overheads assigned Activity drivers Number of orders Number of moves Direct labor hours Number of setups Number of inspections Number of components Square feet occupied 1 Activity usage 60 800 5,300 100 450 16,000 8 ,000 Overhead rate 124.00 10.33 2.16 77.00 16.00 0.78 4.00 Overheads assigned 7,440.00 8,264.00 11,448.00 7,700.00 7,200.00 12,480.00 32,000.00 86,532.00