Question

Problem 9-51 Activity-Based Costing and Predetermined Overhead Allocation Rates (LO 9-3, 5, 6) 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 Processing orders Setting up production Handling materials Machine depreciation and maintenance Performing quality control Packing Total estimated cost Recommended Cost Driver Number of orders Number of production runs Pounds of materials used Machine-hours Number of inspections Number of units Estimated Cost $ 42,000 187,000 280,000 220,000 68,000 122,500 $919,500 Estimated Cost Driver Activity 175 orders 110 runs 100,000 pounds 11,000 hours 50 inspections 490,000 units 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 $42,000 440 Standard 25,000 $21,000 430 Silver 10,000 $18,000 580 12 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 15,000 580 6,000 130 3,400 100 60,000 25,000 10,000 Actual labor costs were $14 per hour. Required: (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. (Round your answers to 2 decimal places.) Activity Processing orders Setting up production Handling materials Using machines Performing quality control Packing Rate per order per run per pound per machine hour per inspection per unit

Answer 1

a (1)	Activity	Rate	Working note
	Processing order	240 per order	42000/175
	Setting up production	1700 per run	187000/110
	Handling Materials	2.8 per pound	280000/100000
	Using Machines	20 per machine hour	220000/11000
	Performing Quality control	1360 per inspection	68000/50
	packing	.25 per unit	122500/490000
2	Pre-determined rate using labor hours
	Total overhead rate/ total labor hours
	$919500/7500
	122.6
b	Account	Institutional	standard	Silver	Total
	Direct materials	$42000	$21000	$18000	$81000
	Direct Labor	$6160	$6020	$8120	$20300
		(440*14)	(430*14)	(580*14)	(1450*14)
	Indirect cost	$53944	$52718	$71108	$177770
		(440*122.6)	(430*122.6)	(580*122.6)	(1450*122.6)
	Total cost	$102104	$79738	$97228	$279070
c	Account	Institutional	standard	Silver	Total
	Direct materials	$42000	$21000	$18000	$81000
	Direct labor	$6160	$6020	$8120	$20300
	Indirect cost
	Processing order	$2880	$1680	$1440	$6000
	Setting up production	$3400	$5100	$11900	$20400
	Handling material	$42000	$16800	$9520	$68320
	Using machines	$11600	$2600	$2000	$16200
	performing quality control	$2720	$2720	$4080	$9520
	packing	$15000	$6250	$2500	$23750
	Total cost	$125760	$62170	$57560	$245490