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. Recommended Cost Driver Number of orders Number of production runs Pounds of materials used Estimated Cost $ 46,000 198,000 260,000 Estimated Cost Driver Activity 200 orders 110 runs 130,000 pounds Activity Processing orders Setting up production Handling materials Machine depreciation and maintenance Performing quality control Packing Total estimated cost Machine-hours Number of inspections Number of units 247,800 51,200 138,000 $940,200 13,000 hours 40 inspections 460,000 units 5 In addition, management estimated 7,100 direct labor-hours for year 2. Assume that the following cost driver volumes occurred in January, year 2. Number of units produced Direct materials costs Direct labor-hours Number of orders Number of production runs Pounds of material Machine-hours Number of inspections Units shipped Institutional 58,000 $37,000 440 13 3 16,000 570 4 58,000 Standard 22,000 $24,000 440 9 3 5,000 140 3 22,000 Silver 9,000 $17,000 610 5 6 3,100 60 3 9,000 Actual labor costs were $15 per hour. Required:

Answer 1

a1.

PREDETERMINE OVERHEAD RATE FOR YEAR 2 AS PER DIRECT LABOUR COST

PROCESSING CAST	46000/200 = 230 PER ORDER
SETTING UP PRDUCTION	198000/110 = 1800 PER RUN
HANDING MATERIAL	260000/130000 = 2 PER POUNDS
USING MACHINE	247000/ 13000= 19 PER MACHINE HOUR
PERFORMING QUALITY CONTROL	51200/ 40 =1280 PER INSPECTION
PACKING	138000/ 46000 = 0.30 PER UNIT

a2.

PREDETERMINE RATE USING DIRECT LAOUR AS BASE IS = 940200/7100 =132.42 PER DIRECT LABOUR HOUR .

b.

account	institutinal	standard	silver	total
direct material	37000	24000	17000	78000
direct labour	440*15 =6600	440*15=6600	610*15=9150	22350
indirect cost	132.42*440=58264.8	132.42*440=58264.8	132.42*610=80776.2	197305.8

c

account	institutional	standard	silver	total
direct material	37000	24000	17000	78000
direct labour	6600	6600	9150	22350
indirect
processing cost	230*13=2990	230*9 =2070	5*230= 1150	6210
setting up production	3*1800= 5400	1800*3= 5400	1800*6= 10800	21600
handing material	16000*2= 32000	5000*2=10000	3100*2=6200	48200
using machine	570*19=10830	140*19=2660	60*19=1140	14630
permancing quality contro	4*1280=5120	3*1280=3840	3*1280=3840	12800
packing	58000*0.3=17400	22000*0.3=6600	9000*0.3=2700	26700
total	117340	61170	51980	230490