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.

Acivity Recommended Estimated Estimated Cost
Cost Driver Cost Driver Activity
Processing orders Number of orders $46,000 200 orders
Setting up production Number of production
runs 240,000 120 runs
Handling materials Pounds of materials
used 325,000 130,000 pounds
Machine depreciation
and maintenance Machine-hours 264,000 12,000 hours
Performing quality
control Number of inspections 57,600 45 inspections
Packing Number of units 115,000 460,000 units
Total estimated cost $1,047,600
In addition, management estimated 7,700 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 63,000 20,000 11,000
Direct materials costs $38,000 $23,000 $15,000
Direct labor-hours 490 430 580
Number of orders 12 10 6
Number of production runs 4 3 5
Pounds of material 15,000 6,000 3,300
Machine-hours 560 130 60
Number of inspections 4 2 3
Units shipped 63,000 20,000 11,000
Actual labor costs were $15 per hour.
1A. 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.
1B. Compute a predetermined rate for year 2 using direct labor-hours as the allocation base.
2. Compute the production costs for each product for January using direct labor-hours as the allocation base and the predetermined rate computed in requirement 1.
3. Compute the production costs for each product for January using the cost drivers recommended by the consultant and the predetermined rates computed in requirement 1.

Answer 1

Kitchen Supply, Inc. (KSI)

1A. Predetermined rate for each cost driver:

Activity Cost Driver Overhead Rate

Processing orders $46,000/200 orders $230 per order

Setup 240,000/120 runs $2,000 per production run

Handling materials 325,000/130,000 pounds $2.5 per pound

Machine depreciation

and maintenance 264,000/12,000 hours $22 per machine hour

Quality control 57,600/45 inspections $1,280 per inspection

Packing 115,000/60,000 units $0.25 per unit

1B. A predetermined rate, using direct labor-hours

= $136.05 per dlh

3. Production costs, using direct labor-hours and the predetermined rate:

Institutional Standard Silver Total

Number of units produced 63,000 20,000 11,000 94,000

Direct labor-hours 490 430 580 1,500

Direct materials costs $38,000 $23,000 $15,000 $76,000

Direct labor costs 7,350 6,450 8,700 22,500

Total overhead costs allocated 66,665 58,502 78,909 204,076

Total production costs $112,015 $87,952 $108,359 $302,576

4. Production costs, using the recommended cost drivers and the predetermined activity rates:

Institutional Standard Silver Total

Number of units produced 63,000 20,000 11,000 94,000

Direct materials costs $38,000 $23,000 $15,000 $76,000

Direct labor costs 7,350 6,450 8,700 22,500

Total overhead costs allocated 81,450 33,720 27,540 142,710

Total production costs $126,800 $63,170 $51,240 $241,210

Step-by-step explanation:

a) Data and Calculations:

Estimated Direct labor-hours for Year 2 = 7,700

Estimated overhead costs = $1,047,600

Activity Recommended Estimated Cost Estimated

Cost Driver Cost Driver Activity

Processing orders Number of orders $46,000 200 orders

Setup Number of runs 240,000 120 runs

Handling materials Pounds of materials 325,000 130,000 pounds

Machine depreciation

and maintenance Machine-hours 264,000 12,000 hours

Quality control Number of inspections 57,600 45 inspections

Packing Number of units 115,000 460,000 units

Total estimated cost $1,047,600

Cost Driver Volumes in January Year 2:

Institutional Standard Silver Total

Number of units produced 63,000 20,000 11,000 94,000

Direct materials costs $38,000 $23,000 $15,000

Direct labor-hours 490 430 580 1,500

Direct labor costs 7,350 6,450 8,700 22,500

Number of orders 12 10 6 28

Number of production runs 4 3 5 12

Pounds of material 15,000 6,000 3,300 24,300

Machine-hours 560 130 60 750

Number of inspections 4 2 3 9

Units shipped 63,000 20,000 11,000 94,000

Actual labor costs were $15 per hour.

Activity Cost Driver Estimated cost Estimated Activity Overhead Rate

Processing orders $46,000 200 orders $230 per order

Setup 240,000 120 runs $2,000 per run

Handling materials 325,000 130,000 pounds $2.5 per pound

Machine depreciation

and maintenance 264,000 12,000 hours $22 per m. hour

Quality control 57,600 45 inspections $1,280 per inspec

Packing 115,000 460,000 units $0.25 per unit

Activity Cost Driver Overhead Rate Institutional Standard Silver Total

Processing orders $230 per order $2,760 $2,300 $1,380 $6,440

Setup $2,000 per run 8,000 6,000 10,000 24,000 Handling materials $2.5 per pound 37,500 15,000 8,250 60,750

Machine depreciation

and maintenance $22 per m. hour 12,320 2,860 1,320 16,500

Quality control $1,280 per insp. 5,120 2,560 3,840 11,520

Packing $0.25 per unit 15,750 5,000 2,750 23,500

Total overhead costs allocated $81,450 $33,720 $27,540 $142,710

Institutional Standard Silver Total

Number of units produced 63,000 20,000 11,000 94,000

Direct materials costs $38,000 $23,000 $15,000 $76,000

Direct labor costs 7,350 6,450 8,700 22,500

Total overhead costs allocated 81,450 33,720 27,540 142,710

Total production costs $126,800 $63,170 $51,240 $241,210

Predetermined rate for Year 2, using direct labor-hours:

= Total overhead costs/Total direct labor-hours

= $1,047,600/7,700 = $136.05 per dlh

Institutional Standard Silver Total

Number of units produced 63,000 20,000 11,000 94,000

Direct labor-hours 490 430 580 1,500

Direct materials costs $38,000 $23,000 $15,000 $76,000

Direct labor costs 7,350 6,450 8,700 22,500

Total overhead costs allocated 66,665 58,502 78,909 204,076

Total production costs $112,015 $87,952 $108,359 $302,576