Kitchen Supply, Inc. (KSI), manufactures three types of flatware: institutional,
ID: 2571329 • Letter: K
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.
Recommended
Cost Driver
Estimated
Cost
Estimated Cost
Driver Activity
In addition, management estimated 7,400 direct labor-hours for year 2.
Assume that the following cost driver volumes occurred in January, year 2:
Actual labor costs were $14 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.)
? per order
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.)
Total
ActivityRecommended
Cost Driver
Estimated
Cost
Estimated Cost
Driver Activity
Processing orders Number of orders $48,000 200 orders Setting up production Number of production runs 187,000 110 runs Handling materials Pounds of materials used 325,000 130,000 pounds Machine depreciation and maintenance Machine-hours 200,00 10,000 hours Performing quality control Number of inspections 58,950 45 inspections Packing Number of units 125,000 50,000 units Total estimated cost $943,950Explanation / Answer
Answer a-1 Computation of predetermined overhead rate for year 2 for each cost driver Processing order activity = Estimated cost / Estimated cost driver activity = $48000 / 200 orders = $240 per order Setting up production activity = Estimated cost / Estimated cost driver activity = $187000/110 runs = $1700 per run Handling Material activity = Estimated cost / Estimated cost driver activity = $325000/130000 pounds = $2.50 per pound Machine depreciation and maintenance activity = Estimated cost / Estimated cost driver activity = $200000/10000 hours = $20 per machine hour Performing quality control activity = Estimated cost / Estimated cost driver activity = $58950/45 inspection = $1310 per inspection Packing activity = Estimated cost / Estimated cost driver activity = $125000/500000 units = $0.25 per unit Answer a-2 Predetermined overhead rate using direct labor-hours as the allocation base = Estimated overheads for Year 2 / Estimated direct labour hours for year 2 Predetermined overhead rate using direct labor-hours as the allocation base = $943950 / 7400 direct labour hours = $127.56 per direct labour hour Answer b Computation of production costs for each product for January using direct labor-hours as the allocation base Account Institutional Standard Silver Total Direct Material $43,000.00 $23,000.00 $13,000.00 $79,000.00 Direct Labour $6,720.00 $6,300.00 $7,980.00 $21,000.00 Indirect cost $61,229.19 $57,402.36 $72,709.66 $191,341.22 Total Costs $110,949.19 $86,702.36 $93,689.66 $291,341.22 Answer c Compute the production costs for each product for January using the cost drivers recommended by the consultant Account Institutional Standard Silver Total Direct Material $43,000.00 $23,000.00 $13,000.00 $79,000.00 Direct Labour $6,720.00 $6,300.00 $7,980.00 $21,000.00 Indirect Costs - Processing order $2,640.00 $2,400.00 $1,680.00 $6,720.00 - setting up production $5,100.00 $6,800.00 $8,500.00 $20,400.00 - Handling Material $40,000.00 $17,500.00 $8,000.00 $65,500.00 - Using machine $11,400.00 $3,200.00 $1,800.00 $16,400.00 - Performing quality control $5,240.00 $2,620.00 $2,620.00 $10,480.00 - Packing $15,750.00 $7,000.00 $2,250.00 $25,000.00 Total Costs $129,850.00 $68,820.00 $45,830.00 $244,500.00
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