Question

[The following information applies to the questions displayed below. Kitchen King's Toledo plant manufactures three product lines, all multi-burner, ceramic cook tops. The plant's three product models are the Regular (REG), the Advanced (ADV). and the Gourmet (GMT). Until recently, the plant used a job- order product-costing system, with manufacturing overhead applied on the basis of direct-labor hours. The following table displays the basic data upon which the traditional costing system was based. $171 (9 hrs. $19 per hr.) $2e9 (11 hrs. $19 per hr.) hr 17,880 (17 MH x 1,888) The annual budgeted overhead is $1,224,000, and the company's predetermined overhead rate is $12 per direct-labor hour. The product costs for the three product models, as reported under the plant's traditional costing system, are shown GMT Direct labor (not including set-up time) 171.88 (9 hr. $19) 289.80 (11 hr $19) 247.8 (13 hr. $19) 188.8e (9 hr. $12) 132.8 (11 hr. $12) 156.8 (13 hr. $12) Kitchen King's pricing policy is to set a target price for each product equal to 130 percent of the full product cost. Due to price competition from other appliance manufacturers, REG units were selling at $525, and ADV units were selling for $628. These prices were somewhat below the firm's target prices. However, these results were partially offset by greater- than-expected profits on the GMT product line. Management had raised the price on the GMT model to $800, which was higher than the original target price. Even at this price, Kitchen King's customers did not seem to hesitate to place orders, Moreover, the company's competitors did not mount a challenge in the market for the GMT product line. NeverthelesS, concern continued to mount in Toledo about the difficulty in the REG and ADV markets. After all, these were the plant's bread-and-butter products, with projected annual sales of 5,000 REG units and 4,000 ADV units. Kitchen King's director of cost management, Angela Ramirez, had been thinking for some time about a refinement in the Toledo plant's product-costing system. Ramirez wondered if the traditional, volume-based system was providing management with accurate data about product costs. She had read about activity-based costing, and wondered if ABC would be an improvement to the plant's product-costing system. After some discussion, an ABC proposal was made to the company's top management, and approval was obtained. The data collected for the new ABC system is displayed in the tion ng

Answer 1

1	Predetermined overhead rate=Annual budgeted overhead/Estimated direct labor hours
	Estimated direct labor hours=Planned volume in units*labor hours per unit
					Hours
	REG	(5000*9)			45000
	ADV	(4000*11)			44000
	GMT	(1000*13)			13000
	Total labor hours				102000
	Predetermined overhead rate=1224000/102000=$ 12 per unit
2	Activity		Activity cost pool	Cost driver		Cost driver quantity	Pool rate	Product line	Cost driver quantity for product line	Activity cost for product line	Product line production volume	Activity cost per unit of product
			a			b	c=a/b		d	e=c*d
	Machine related		310500	Machine hours		115000	2.7	REG	50000	135000	5000	27
								ADV	48000	129600	4000	32.4
								GMT	17000	45900	1000	45.9
								Total	115000	310500
	Material handling		52500	Production runs		100	525	REG	40	21000	5000	4.2
								ADV	40	21000	4000	5.25
								GMT	20	10500	1000	10.5
								Total	100	52500
	Purchasing		75000	Purchase orders		300	250	REG	100	25000	5000	5
								ADV	96	24000	4000	6
								GMT	104	26000	1000	26
								Total	300	75000
	Setup		85000	Production runs		100	850	REG	40	34000	5000	6.8
								ADV	40	34000	4000	8.5
								GMT	20	17000	1000	17
								Total	100	85000
	Inspection		27500	Inspection hours		1100	25	REG	400	10000	5000	2
								ADV	400	10000	4000	2.5
								GMT	300	7500	1000	7.5
								Total	1100	27500
	Shipping		66000	Shipments		1100	60	REG	500	30000	5000	6
								ADV	400	24000	4000	6
								GMT	200	12000	1000	12
								Total	1100	66000
	Engineering		32500	Engineering hours		650	50	REG	250	12500	5000	2.5
								ADV	200	10000	4000	2.5
								GMT	200	10000	1000	10
								Total	650	32500
	Facility		575000	Machine hours		115000	5	REG	50000	250000	5000	50
								ADV	48000	240000	4000	60
								GMT	17000	85000	1000	85
								Total	115000	575000
								Grand total		1224000