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. Estimated Recommended Estimated Cost Driver Activity Activity Processing orders Setting up production Handling materials Machine depreciation and maintenance Machine-hours Performing quality control Packing Cost Driver Cost $ Number of orders 54,000 216,000 360,000 288,000 72,000 144,000 $1,134,000 200 orders 100 runs Number of production runs Pounds of materials used 120,000 pounds 12,000 hours 45 inspections 480,000 units Number of inspections Number of units Total estimated cost In addition, management estimated 7,500 direct labor-hours for year 2 Assume that the following cost driver volumes occurred in January, year 2. Institutional 60,000 $39,000 450 Standard Silver 9,000 $15,000 600 Number of units produced Direct materials costs Direct labor-hours Number of orders 24,000 $24,000 450 12 6 Number of production runs Pounds of material Machine-hours Number of inspections Units shipped 3 3 3,000 80 15,000 580 6,000 140 3 3 24,000 9,000 60,000 Actual labor costs were $15 per hour

Answer 1

Per unit rate is calculated by dividing estimated cost by estimated cost driver activity.

Activity Processing Orders Setting up production Handling Materials using machines Performing Quality Control Packing Rate 270 Per Order 2160 Per Run 3 Per Pound 24 Per Machine Hour 1600 Per Inspection 0.3 Per Unit

Predetermined by direct labor hour = Total estimated indirect cost / estimated labor hours

=1134000/7500 = 151.20

Account	Institutional	Standard	Silver	Total
Direct Material	$39,000.00	$24,000.00	$15,000.00	$78,000.00
Direct Labor	$6,750.00	$6,750.00	$9,000.00	$22,500.00
Indirect Cost	$68,040.00	$68,040.00	$90,720.00	$2,26,800.00
	$1,13,790.00	$98,790.00	$1,14,720.00

Direct labor is calculated by multiplying Estimated labor hour by labor rate of 15 per hour and indirect cost at the predetermined by direct labor hour

Account	Institutional	Standard	Silver	Total
Direct Material	$39,000.00	$24,000.00	$15,000.00	$78,000.00
Direct labor	$6,750.00	$6,750.00	$9,000.00	$22,500.00
Indirect cost
Processing orders	$3,240.00	$2,430.00	$1,620.00	$7,290.00
Setting up production	$6,480.00	$6,480.00	$12,960.00	$25,920.00
Handling materials	$45,000.00	$18,000.00	$9,000.00	$72,000.00
Using Machines	$13,920.00	$3,360.00	$1,920.00	$19,200.00
Performing Quality Control	$4,800.00	$4,800.00	$4,800.00	$14,400.00
Packing	$18,000.00	$7,200.00	$2,700.00	$27,900.00
	$1,37,190.00	$73,020.00	$57,000.00	$2,67,210.00