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.

Activity	Recommended Cost Diver	Estimated Cost	Estimated Cost Driver Activity
Processing orders	Number of orders	$ 46,000	200 orders
Setting up production	Number of production runs	180,000	100 runs
Handling materials	Pounds of Materials used	220,000	110,000 pounds
Machine depreciation and maintenance	Machine-hours	220,000	11,000 hours
Performing quality control	Number of inspections	62,100	45 inspections
Packing	Number of units	135,000	450,000 units
Total estimated cost		$863,100

In addition, management estimated 7,300 direct labor-hours for year 2.

Assume that the following cost driver volumes occurred in January, year 2.

	Institutional	Standard	Silver
Number of units produced	60,000	21,000	8,000
Direct materials costs	$38,000	$20,000	$15,000
Direct labor-hours	400	410	630
Number of orders	13	7	6
Number of production runs	3	3	6
Pounds of material	14,000	6,000	3,200
Machine-hours	560	140	80
Number of inspections	4	3	2
Units shipped	60,000	21,000	8,000

Actual labor costs were $16 per hour.

Required: a. (1) Compute a predetermined overhead rate for year 2 for each cost driver using the estimated costs and estimated cost driver units prepared by the consultant.

(2) Compute a predetermined rate for year 2 using direct labor-hours as the allocation base.

b. Compute the production costs for each product for January using direct labor-hours as the allocation base and the predetermined rate computed in requirement a(2).

c. Compute the production costs for each product for January using the cost drivers recommended by the consultant and the predetermined rates computed in requirement a. (Note: Do not assume that total overhead applied to products in January will be the same for activity-based costing as it was for the labor-hour-based allocation.)

Answer 1

Answer with working notes is given below

Calculation of Activity rates Total Total Activity activity rate Processing order Setting up production Handling material Machine depreciation and maintenance Performing quality control Packing Total budgeted indirect costs Overheads $46,000 $180,000 $220,000 $220,000 $62,100 $135,000 $863,100 Activities 200 100 110,000 11,000 $230.00 per order $1,800.00 per production run $2.00 per pound $20.00 per machine hour $1,380.00 per inspection $0.30 per unit 450,000 3 Traditional Overhead rate Total Overheads Total Direct labor hours $863,100 7,300 $118.23 Per direct labor hour b) Standard 410 Direct labor hours Overhead rate per direct labor hour Total Overheads allocated Direct labor rate Total Direct Labor cost Institutional 400 $118.231 $47,293 $16.00 $6,400 $118.23 $48,475 $16.00 Silver 630 $118.23 $74,487 A $16.00 $10,080 $6,560 Total manufacturing cost per unit- Traditional Costing Institutional Direct Material $38,000 Direct Labor $6,400 Total Overhead allocated $47,293 Total manufacturing cost $91,693 Total Output 60,000 Production cost per unit $1.53 Standard $20,000 $6,560 $48,475 $75,035 21,000 $3.57 Silver $15,000 $10,080 $74,487 $99,567 8,000 $12.45 Allocation of Overheads - ABC method Cost activity rate Activities used Allocated Cost Activity Institutional Standard Silver $230.00 $1,800.00 $2.00 Institutional $2,990 $5,400 $28,000 Standard $1,610 $5,400 $12,000 Silver $1,380 $10,800 $6,400 14,000 6,000 3,200 Processing order Setting up production Handling material Machine depreciation and maintenance Performing quality control Packing Total Overheads 560 140 80 $20.00 $1,380.00 $0.30 $11,200 $5,520 $18,000 $71,110 $2,800 $4,140 $6,300 $32,250 $1,600 $2,760 $2,400 $25,340 60,000 21,000 8,000 Total manufacturing cost per unit- ABC method Institutional Standard Direct Material $38,000 $20,000 Direct Labor $6,400 $6,560 Total Overhead allocated $71,110 $32,250 Total manufacturing cost $115,510 $58,810 Total Output 60,000 21,000 Production cost per unit $1.93 $2.80 Silver $15,000 $10,080 $25,340 $50,420 8,000 $6.30

Answer 2

B)institutional

400*118.23= 47292

400*16= 6400

indirect cost (total overhead allocated)

230*13= 2,990