Question

Problem 5-39A (Part Level Submission) Stellar Stairs Co. designs and builds factory-made premium wooden stairs for homes. The manufactured stair components (spindles, risers, hangers, hand rails) permit installation of stairs of varying lengths and widths. All are made of white oak wood. The company’s budgeted manufacturing overhead costs for 2016 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 budget overhead costs $852,000 For the last four years, Stellar Stairs Co. has been charging overhead to products on the basis of machine hours. For 2016, it has budgeted 100,000 machine hours. Heather Fujar, owner-manager of Stellar Stairs Co., recently directed her accountant, Kiko Nishikawa, to implement the activity-based costing system that she has repeatedly proposed. At Heather Fujar’s request, Kiko and the production foreperson identify the following cost drivers and their usage for the previously budgeted overhead cost pools. Activity Cost Pools Cost Drivers Expected Use of Cost Drivers Purchasing Number of orders 660 Handling materials Number of moves 8,130 Production    (cutting, milling, finishing) Direct labour hours 103,240 Setting up machines Number of set-ups 1,620 Inspecting Number of inspections 6,150 Inventory control    (raw materials and finished goods) Number of components 170,300 Utilities Square metres occupied 9,060    Jason Dion, sales manager, has received an order for 280 stairs from Community Builders, Inc., a large housing development contractor. At Jason’s request, Kiko prepares cost estimates for producing components for 280 stairways so Jason can submit a contract price per stair to Community Builders. She accumulates the following data for the production of 280 stairways: Direct materials $103,600 Direct labour 112,000 Machine hours 14,500 Direct labour hours 5,000 Number of purchase orders 60 Number of material moves 800 Number of machine set-ups 100 Number of inspections 450 Number of components 16,000 Number of square metres occupied 800

(a) Calculate the predetermined overhead rate using traditional costing with machine hours as the basis. (Round answer to 2 decimal places, e.g. 15.25.) Predetermined overhead rate $    per machine hour

(b) What is the manufacturing cost per stairway under traditional costing? (Round answer to 2 decimal places, e.g. 15.25.) Manufacturing cost per stairway $

(c) What is the manufacturing cost per stairway under the proposed activity-based costing? (Round answer to 2 decimal places, e.g. 15.25.) Manufacturing cost per stairway $

(d) Which of the two costing systems is preferable in pricing decisions? Traditional costing or Activity-based costing?

Answer 1

a Predetermined Overhead Rate 8.52 per machine hour = Estimated Overhead Esimated machine hour =852000 100000 b Calculations of unit cost under traditional method. Direct Material Direct Labor Overhead cost ($ 8.52 x 51.79 hr) Cost per staircase Stairway 370.00 (103600/280) 400.00 (112000/280) 441.25 Predetermined overhead rate x machine hour per unit 1,211.25 Machine hour per unit = total machine hour/number of units = 14500 / 280 = 51.79 Schedule Showing computation of activity based overhead rates (per cost driver). Activity rate = Budgeted Cost/ Budgeted Activity Budgeted Activity Activity Rate Activity Budgeted Cost S Purchasing Handling Material Production Setting Up Machine Inspecting Inventory Control Utilities Total Manufacturing Cost 69,000 82,000 210,000 95,000 90,000 126,000 180,000 852,000 660 Purchase Order $ 104.55 Per Order 8,130 material moves $ 10.09 Per moves 103,240 direct labor hou $ 2.03 Per direct labor hour 1,620 set up $ 58.64 Per set up 6,150 inspection $ 14.63 per inspection 170,300 components $ 0.74 per components 9,060 square feet $ 19.87 per square feet Schedule showing assigning of each product based on the use of cost driver Cost Assigned = Expected Cost driver * Activity based overhead rate (A) (B) (A)/(B) Activity cost pool Stairway Expected Activity Activity Rate Cost Assigned Purchasing 60 $ 104.55$ 6,273 Handling Material 800 $ 10.27 $ 8,216 Production 5000 $ 2.19 $ 10,950 Setting Up Machine 100 $ 58.64 $ 5,864 Inspecting 450 $ 14.63 $ 6,585 Inventory Control 16000 $ 0.84 $ 13,440 Utilities 800 $ 19.87 $ 15,894 Total Cost Assigned $ 67,222 Total Units (b) 280 Overhead cost per unit (a)/(b) $ 240.08 (a Total cost per pound under ABC method: Direct Material Direct Labor Overhead cost Total Cost Per stairway Stairway 370.00 400.00 240.08 1,010.08 $ $ d Activity costing method is more preferrable as it shows clear picture of cost applied to each product.