Question

and traditional cost compare results. (LO 1,2). AN Inspecting 17.3A Shaker Stairs Co. designs and builds factory-made premium wooden stairways for homes. The manufactured stairway components (spindles, risers, hangers, hand rails) d i permit installation of stairways of varying lengths and widths. All are of white oak wood. ng lengths and widths. All are of white onk wood Budgeted manufacturing overhead costs for the year 2017 are as follows. Overhead Cost Pools Amount Purchasing $ 75,000 Handling materials 82,000 Production (cutting, milling, finishing) 210,000 Setting up machines 105.000 90,000 Inventory control (raw materials and finished goods) 126,000 Utilities 180,000 Total budgeted overhead costs $868,000 For the last 4 years, Shaker Stairs Co. has been charging overhead to products on the basis of machine hours. For the year 2017. 100.000 machine hours are budgeted. Jeremy Nolan, owner-manager of Shaker Stairs Co. recently directed his accountant, Bill Seagren, to implement the activity-based costing system that he has repeatedly pro- posed. At Jeremy Nolan's request. Bill and the production foreman identify the following cost drivers and their usage for the previously budgeted overhead cost pools. Activity Cost Pools Purchasing Handling materials Production (cutting, milling, finishing) Setting up machines Inspecting Inventory control (raw materials and finished goods) Utilities Cost Drivers Number of orders Number of moves Direct labor hours Number of setups Number of inspections Expected Use of Cost Drivers 600 8,000 100,000 1,250 6,000 Number of components Square feet occupied 168,000 90,000 Steve Hannon, sales manager, has received an order for 250 stairways from Com- munity Builders, Inc., a large housing development contractor. At Steve's request, Bill prepares cost estimates for producing components for 250 stairways so Steve can submit a contract price per stairway to Community Builders. He accumulates the following data for the production of 250 stairways. Direct materials $103.600 Direct labor $112.000 Machine hours 14,500 Direct labor hours 5,000 Number of purchase orders Number of material moves 800 Number of machine setups 100 Number of inspections 450 Number of components 16,000 Number of square feet occupied 8,000

Answer 1

1.

Predetermined overhead rate = Estimated overhead cost / Estimated machine hours

Predetermined overhead rate = $868,000 / 100,000 = $8.68 per machine hour

2.

Manufacturing cost per stairway under traditional costing:

Direct material	$103,600
Direct labor	112,000
Applied overhead (14,500*$8.68)	125,860
Total manufacturing costs	$341,460
Total stairways	250
Manufacturing cost per stairway ($341,460/250)	$1,365.84

3.

Activity cost pools	Overhead costs	Activity cost driver	Activity rate
Purchasing	$75,000	600	$125	per order
Handling materials	82,000	8,000	10.25	per move
Production	210,000	100,000	2.1	per direct labor hour
Setting up machines	105,000	1,250	84	per setup
Inspecting	90,000	6,000	1.5	per inspection
Inventory control	126,000	168,000	0.75	per component
Utilities	180,000	90,000	2	per square feet occupied

Direct material	$103,600
Direct labor	112,000
Applied overhead:
Purchasing (60*$125)	7,500
Handling materials (800*$10.25)	8,200
Production (5,000*$2.1)	10,500
Setting up machines (100*$84)	8,400
Inspecting (450*$1.5)	675
Inventory control (16,000*$0.75)	12,000
Utilities (8,000*$2)	16,000
Total manufacturing costs	$278,875
Total stairways	250
Manufacturing cost per stairway ($341,460/250)	$1,115.5

4.

As per above results activity based costing system should be preferred as manufacturing cost per unit is lower than traditional costing.