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 Driver	Estimated Cost			Estimated Cost Driver Activity
Processing orders	Number of orders	$	52,875		225	orders
Setting up production	Number of production runs		228,000		120	runs
Handling materials	Pounds of materials used		264,000		120,000	pounds
Machine depreciation and maintenance	Machine-hours		231,000		11,000	hours
Performing quality control	Number of inspections		54,400		40	inspections
Packing	Number of units		112,500		450,000	units
Total estimated cost		$	942,775

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		63,000			25,000			8,000
Direct materials costs	$	35,000		$	22,000		$	15,000
Direct labor-hours		470			460			590
Number of orders		13			8			6
Number of production runs		3			3			6
Pounds of material		18,000			6,000			3,000
Machine-hours		610			120			80
Number of inspections		2			3			3
Units shipped		63,000			25,000			8,000

Actual labor costs were $15 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. (Round your answers to 2 decimal places.)

Processing orders- per order

setting up production-per run

handing materials- per pound

using machines-per machine

performing quality control-per inspection

Packing-per unit

(2) Compute a predetermined rate for year 2 using direct labor-hours as the allocation base. (Round your answer to 2 decimal places.)

Predetermined rate per direct labor hour

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). (Do not round intermediate calculations.)

Accounts    Institutional standard silver total

Direct Materials 35000   22000 15000 72000

Direct Labor

Indirect costs

Total cost

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.) (Do not round intermediate calculations.)

Account Institutional standard silver Total

Direct materials 35,000 22,000 15,000 72,000

Direct labor

Indirect costs

Processing orders

setting up production

handling materials

using machines

performing quality control

packing

total cost   

Answer 1

Kitchen supply Inc. 1- Calculation of Predetermined allocation Rate Predetermin Allocation base Part a (1) Total Cost/ ed allocation rate Processing orders | Setting up production Handling materials Dep. Performing QC Packing 52875 225 235 per order 228000 120 1900 per run 120000 264000 2.2 per pound 231000 11000 21 per hour per inspection 54400 40 1360 112500 450000 0.25 per unit 942775 a.(2) Predetermined rate per DLH = 942775/7100 $132.785 per DLH Total Part b Institutional Standard Silver Direct materials 35000 22000 15000 72000 470 15 460 15 590 15 Direct labour 7050 6900 8850 22800 470 132.785 460 132.785 590 132.785 Indirect costs 201833 62409 61081 78343 Total cost 104459 89981 102193 296633 Part c Institutional Standard Silver Total Direct materials Direct labour 22000 35000 15000 72000 7050 6900 8850 22800 Indirect costs: | Processing orders |Setting up production Handling materials Dep. Performing QC Packing Total cost 3055 1880 1410 6345 5700 5700 11400 22800 39600 13200 6600 59400 12810 2520 1680 17010 2720 4080 4080 10880 15750 6250 2000 24000 121685 62530 51020 235235

Working notes Institutional Processing orders Setting up production Handling materials Dep Performing QC Packing Total cost Activity Driver Activity Rate 235 13 3055 5700 3 1900 18000 2.2 39600 610 21 12810 2 1360 2720 0.25 63000 15750 Standard Activity Driver Activity Rate Total cost Processing orders |Setting up production Handling materia ls Dep 8 235 1880 3 1900 5700 13200 6000 2.2 120 21 2520 Performing QC 1360 4080 Packing 25000 0.25 6250 Silver Processing orders Setting up production Handling materials Dep. Total cost Activity Driver Activity Rate 6 235 1410 6 1900 11400 3000 2.2 6600 80 21 1680 1360 Performing QC Packing 3 4080 8000 0.25 2000