Question

Assign overhead costs using traditional costing and A B C; compare results.

(LO 1 2 ), AN 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 2022 are as follows.

Overhead Cost Pools	Amount
Purchasing	$75,000
Handling materials	82,000
Production (cutting, milling, finishing)	210,000
Setting up machines	105,000
Inspecting	90,000
Inventory control (raw materials and finished goods)	126,000
Utilities	180,000
Total budgeted overhead costs	$868,000

For the last 4 years, Shaker Stairs Co. has been charging overhead to products on the basis of machine hours. For the year 2022,100,000 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	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.

Instructions

(a) Compute the predetermined overhead rate using traditional costing with machine hours as the basis.

(b) What is the manufacturing cost per stairway under traditional costing? (Round to the nearest cent.) Cost/stairway $ 1,365.84

(c) What is the manufacturing cost per stairway under the proposed activity-based costing? (Round to the nearest cent. Prepare all of the necessary schedules.)

Cost/stairway $ 1,139.80

(d) Which of the two costing systems is preferable in pricing decisions and why?

Answer 1

a Predetermined Overhead Rate 8.68 per machine hour = Estimated Overhead Esimated machine hour =868000 100000 b Calculations of unit cost under traditional method. Direct Material Direct Labor Overhead cost ($ 8.68 x 58 hr) Cost per staircase $ $ $ Stairway 414.40 (103600/250) 448.00 (112000/250) 503.44 Predetermined overhead rate x machine hour per unit 1,365.84 Machine hour per unit = total machine hour/number of units = 14500 / 250 = 58.00 Schedule Showing computation of activity based overhead rates (per cost driver). Activity rate = Budgeted Cost/ Budgeted Activity Budgeted Activity Activity Rate Activity Budgeted Cost 75,000 Purchasing Handling Material Production Setting Up Machine Inspecting Inventory Control Utilities Total Manufacturing Cost $ $ $ $ $ $ $ $ 82,000 210,000 105,000 90,000 126,000 180,000 868,000 600 Purchase Order $ 125.00 Per Order 8,000 material moves $ 10.25 Per moves 100,000 direct labor hou $ 2.10 Per direct labor hour 1,250 set up $ 84.00 Per set up 6,000 inspection $ 15.00 per inspection 168,000 components $ 0.75 per components 90,000 square feet $ 2.00 per square feet Schedule showing assigning of each product based on the use of cost driver (B) Cost Assigned = Expected Cost driver x Activity based overhead rate (A) (A)/(B) Activity cost pool Stairway Expected Activity Activity Rate Cost Assigned Purchasing 60 $ 125.00 $ 7,500 Handling Material 800 $ 10.25 $ 8,200 Production 5000 $ 2.10 $ 10,500 Setting Up Machine 100 $ 84.00 $ 8,400 Inspecting 450 $ 15.00 $ 6,750 Inventory Control 16000 $ 0.75 $ 12,000 Utilities 8000 $ 2.00 $ 16,000 Total Cost Assigned $ 69,350 Total Units (b) | 250 Overhead cost per unit (a)/(b) $ 277.40 Total cost per pound under ABC method: Direct Material Direct Labor Stairway 414.40 448.00 277.40 1,139.80 $ $ $ $ overhea Total Cost Per stairway d Activity costing method is more preferrable as it shows clear picture of cost applied to each product.