Kitchen Supply, Inc. (KSI), manufactures three types of flatware: institutional,

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 Estimated Cost Recommended Cost Driver Activity Processing orders Setting up production Handling materials Machine depreciation and maintenance Performing quality control Packing Total estimated cost Estimated Cost $ 45,000 144,000 364,000 240,000 57,150 144,000 $994.150 Driver Activity 200 ordens Number of orders Number of production runs Pounds of materials used Machine-hours Number of inspections Number of units 90 runs 30,000 pounds 12,000 hours 45 inspections 480,000 units In addition, management estimated 7,000 direct labor-hours for year 2 Assume that the following cost driver volumes occurred in January, year 2: InstitutionalStandard 11,000 $13,000 580 Number of units produced Direct materials costs Direct labor-hours Number of orders Number of production runs Pounds of material Machine-hours Number of inspections Units shipped 58,000 $35,000 450 13 20,000 S25,000 460 16,000 590 6,000 120 2,700 70 58,000 20,000 11,000 Actual labor costs were $15 per hour

Explanation / Answer

a) Estimated Driver rate 1) cost (a) (b) c=a/b processing orders 45,000 200 225 per order Setting up production 144,000 90 1600 per run handling materials 364,000 130,000 2.8 per pound using machines 240,000 12,000 20 per mh performing quality control 57,150 45 1270 per inspection packing 144,000 480,000 0.3 per unit 2) predetermined overhead rate per direct labor hour 142.02 (994,150/7000) institutional standard Silver total b) Account Direct materials 35000 25000 13000 73000 direct labor 6750 6900 8700 22350 indirect costs 63910 65330 82372 211612 total cost 105660 97230 104072 306962 direct labor = DLH*$15 per hour indirect cost = dLH*$142.02 c) institutional standard Silver total Account Direct materials 35000 25000 13000 73000 direct labor 6750 6900 8700 22350 Indirect costs processing orders 2925 2025 1575 6525 Setting up production 4800 4,800 9600 19200 handling materials 44800 16800 7560 69160 using machines 11800 2400 1400 15600 performing quality control 5080 5,080 2540 12700 packing 17400 6000 3300 26700 total cost 128555 69005 47675 245235

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