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 Purchasing Handling materials Production (cutting, milling, finishing) Setting up machines Inspecting Inventory control (raw materials and finished goods) Utilities Total budgeted overhead costs Amount $75,000 82,000 220,000 105,000 108,000 126,000 270,000 $986,000 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 Purchasing Number of orders Handling materials Number of moves Production (cutting, milling, finishing) Direct labor hours Setting up machines Number of setups Inspecting Number of inspections Inventory control (raw materials and finished goods) Number of components Utilities Square feet occupied Estimated Use of Cost Drivers 600 8.000 100.000 1.250 6,000 168,000 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. Direct materials Direct labor Machine hours Direct labor hours $104,100 $113,000 16,000 5,500

Answer 1

Predetermined overhead rate    [Refer working note 1]	$9.86	per machine hour
Cost per stairway             [Refer working note 2]	$1,499.44
Activity-based overhead rate for each activity    [Refer working note 5]
Purchasing	$125.00	Per order
Handling materials	$10.25	Per move
Production	$2.20	per d/L hour
Setting up machines	$84.00	Per setup
Inspecting	$18.00	Per inspection
Inventory control	$0.75	Per component
Utilities	$3.00	Per sq. ft.
Total overhead assigned         [Refer working note 6]	$80,300
Total Cost per stairway           [Refer working note 7]	$1,499.44

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Working note 1 - Computation of predetermined overhead rate
Total budgeted overhead costs        (a)	$986,000
Total budgeted machine hours             (b)	$100,000
Predetermined overhead rate               (a / b)	$9.86

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Working note 2 - Computation of cost per unit
Total manufacturing cost    [Refer working note 3]            (a)	$374,860
Number of units of stairways                                            (b)	250
Cost per Unit                                                                  (a / b)	$1,499.44

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Working note 3 - Computation of total manufacturing costs
Direct material cost                                                            (a)	$104,100
Direct labor cost                                                                 (b)	$113,000
Factory overhead              [Refer working note 4]              (c)	$157,760
Total manufacturing cost                                                  (a + b + c)	$374,860

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Working note 4 - Allocation of overhead to the product using predetermined overhead rate
Actual number of machine hours                                                        (a)	$16,000
Predetermined overhead rate               [Refer working note 1]          (b)	$9.86
Total overhead cost allocated                                                         (a / b)	$157,760

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Working note 5 - Calculation of Activity rate
Activity Cost Pool	Estimated overhead costs (a)	Total expected activity (b)		Activity rate (a / b)
Purchasing	$75,000	600	orders	$125.00	Per order
Handling materials	$82,000	8,000	moves	$10.25	Per move
Production	$220,000	100,000	direct labor hours	$2.20	per direct labor hour
Setting up machines	$105,000	1,250	setups	$84.00	Per setup
Inspecting	$108,000	6,000	inspections	$18.00	Per inspection
Inventory control	$126,000	168,000	components	$0.75	Per component
Utilities	$270,000	90,000	square feet occupied	$3.00	Per square feet occupied

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Working note 6- Allocation of overhead to the product using activity allocation rates
Activity Cost Pool	Activity rate [Refer working note 5]		Activity usage		Allocation amount
	(a)		(b)		(a x b)
Purchasing	$125.00	Per order	60	orders	$7,500.00
Handling materials	$10.25	Per move	800	moves	$8,200.00
Production	$2.20	per direct labor hour	5,500	direct labor hours	$12,100.00
Setting up machines	$84.00	Per setup	100	setups	$8,400.00
Inspecting	$18.00	Per inspection	450	inspections	$8,100.00
Inventory control	$0.75	Per component	16,000	components	$12,000.00
Utilities	$3.00	Per square feet occupied	8,000	square feet occupied	$24,000.00
Total overhead cost allocated					$80,300.00

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Working note 7 - Computation of total cost per unit
Total manufacturing cost    [Refer working note 8]            (a)	$297,400
Number of units of stairways                                            (b)	250
Cost per Unit                                                                  (a / b)	$1,189.60

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Working note 8 - Computation of total manufacturing costs
Direct material cost                                                            (a)	$104,100
Direct labor cost                                                                 (b)	$113,000
Factory overhead              [Refer working note 6]              (c)	$80,300
Total manufacturing cost                                                  (a + b + c)	$297,400