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	Amount
Purchasing	$75,000
Handling materials	82,000
Production (cutting, milling, finishing)	210,000
Setting up machines	100,000
Inspecting	96,000
Inventory control (raw materials and finished goods)	126,000
Utilities	450,000
Total budgeted overhead costs	$1,139,000

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		Cost Drivers	Estimated Use of Cost Drivers
Purchasing		Number of orders	600
Handling materials		Number of moves	8,000
Production (cutting, milling, finishing)		Direct labor hours	100,000
Setting up machines		Number of setups	1,250
Inspecting		Number of inspections	6,000
Inventory control (raw materials and finished goods)		Number of components	168,000
Utilities		Square feet occupied	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.

Answer 1

Part 1
	Predtermined Overhead rate =Estimated manufacturing overhead / Estimated direct labor hours
	Predtermined Overhead rate =$1,139,000 / 100,000 =$11.39 per Machine hours
	Computation of units product cost
		Stairways
	Direct material per unit($103,900/250)	$                                         415.60
	Direct labor cost per unit($113,000/250)	$                                         452.00
	Overhead per unit[(15,000 hrs*$11.39)/250]	$                                         683.40
	Unit Product cost	$                                      1,551.00
Part 2	Calculation of Activity Rate
	Activity	Activity Cost(Col 1)	Cost Driver(Col 2)	Activity Rate(Col 1 / Col.2)
	Purchasing	$                                         75,000	600	$                           125.00	Per order
	Handling materials	$                                         82,000	8000	$                             10.25	Per move
	Production	$                                      2,10,000	100000	$                               2.10	Per dlhs
	Setting up machines	$                                      1,00,000	1250	$                             80.00	Per setup
	Inspecting	$                                         96,000	6000	$                             16.00	Per inspection
	Inventory control	$                                      1,26,000	168000	$                               0.75	Per component
	Utilities	$                                      4,50,000	90000	$                               5.00	Per sq.foot
	Allocation of Activity Costs
		Activity Rate	Activity-Base Usage	Activity Rate * Activity-Base Usage
	Purchasing	$                                         125.00	60	$                             7,500
	Handling materials	$                                           10.25	800	$                             8,200
	Production	$                                             2.10	5500	$                           11,550
	Setting up machines	$                                           80.00	100	$                             8,000
	Inspecting	$                                           16.00	450	$                             7,200
	Inventory control	$                                             0.75	16000	$                           12,000
	Utilities	$                                             5.00	8000	$                           40,000
	Total Overhead Costs			$                           94,450
	Overhead Costs per unit($94,450/250)			$                           377.80	per stairway
	Computation of units product cost
		Stairways
	Direct material per unit($103,900/250)	$                                         415.60
	Direct labor cost per unit($113,000/250)	$                                         452.00
	Overhead per unit	$                                         377.80
	Unit Product cost	$                                      1,245.40