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	$	39,375		175	orders
Setting up production	Number of production runs		192,000		120	runs
Handling materials	Pounds of materials used		308,000		140,000	pounds
Machine depreciation and maintenance	Machine-hours		240,000		12,000	hours
Performing quality control	Number of inspections		61,200		45	inspections
Packing	Number of units		144,000		480,000	units
Total estimated cost		$	984,575

In addition, management estimated 7,600 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		64,000			23,000			8,000
Direct materials costs	$	43,000		$	22,000		$	13,000
Direct labor-hours		480			470			630
Number of orders		12			9			7
Number of production runs		4			2			6
Pounds of material		12,000			6,000			2,600
Machine-hours		590			150			80
Number of inspections		3			2			2
Units shipped		64,000			23,000			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.)

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

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.)

  

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.)

Answer 1

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Kitchen Supply, Inc.
Ans a 1		A	B	C=A/B
Calculation of activity based overhead rates
Activity	Cost Driver	Estimated cost	Cost Driver Activity	ABC Rates
Processing orders	Number of orders	39,375.00	175.00	225.00
Setting up production	Number of production runs	192,000.00	120.00	1,600.00
Handling materials	Pounds of materials used	308,000.00	140,000.00	2.20
Machine depreciation and maintenance	Machine-hours	240,000.00	12,000.00	20.00
Performing quality control	Number of inspections	61,200.00	45.00	1,360.00
Packing	Number of units	144,000.00	480,000.00	0.30
	Total Activity Cost	984,575.00
Ans a 2
Calculation of overhead rate on the basis of direct labor hours:
Particulars	Total	Note
Direct Labor hours	7,600.00	D
Overhead cost	984,575.00	E
Overhead rate per hour	129.55	F=E/D
Ans b	Institutional	Standard	Silver	Note
Direct labor-hours	480.00	470.00	630.00	G
Overhead rate per hour	129.55	129.55	129.55	H
Overhead cost allocated	62,183.68	60,888.19	81,616.09	I=G*H
Direct labor-hours	480.00	470.00	630.00	See G
Direct labor rate	15.00	15.00	15.00	J
Direct labor cost	7,200.00	7,050.00	9,450.00	K=G*J
Product Costs	Institutional	Standard	Silver	Note
Direct materials costs	43,000.00	22,000.00	13,000.00
Direct labor cost	7,200.00	7,050.00	9,450.00	See K
Overhead cost allocated	62,183.68	60,888.19	81,616.09	See I
Product Costs	112,383.68	89,938.19	104,066.09	L
Number of units produced	64,000.00	23,000.00	8,000.00	M
Product Costs per unit	1.76	3.91	13.01	N=L/M
	See C	O	P=O*C	Q	R=Q*C	S	T=S*C
Ans c		Institutional		Standard		Silver
Activity	ABC Rates	Cost Driver Activity	Amount $	Cost Driver Activity	Amount $	Cost Driver Activity	Amount $
Processing orders	225.00	12.00	2,700.00	9.00	2,025.00	7.00	1,575.00
Setting up production	1,600.00	4.00	6,400.00	2.00	3,200.00	6.00	9,600.00
Handling materials	2.20	12,000.00	26,400.00	6,000.00	13,200.00	2,600.00	5,720.00
Machine depreciation and maintenance	20.00	590.00	11,800.00	150.00	3,000.00	80.00	1,600.00
Performing quality control	1,360.00	3.00	4,080.00	2.00	2,720.00	2.00	2,720.00
Packing	0.30	64,000.00	19,200.00	23,000.00	6,900.00	8,000.00	2,400.00
Overhead cost allocated			70,580.00		31,045.00		23,615.00	U
Product Costs	Institutional	Standard	Silver	Note
Direct materials costs	43,000.00	22,000.00	13,000.00
Direct labor cost	7,200.00	7,050.00	9,450.00	See K
Overhead cost allocated	70,580.00	31,045.00	23,615.00	See U
Product Costs	120,780.00	60,095.00	46,065.00	V
Number of units produced	64,000.00	23,000.00	8,000.00	See M
Product Costs per unit	1.89	2.61	5.76	W= V/M