College Supply Company (CSC) makes three types of drinkingglasses: short, medium, and tall. It presently applies overheadusing a predetermined rate based on direct labor-hours. A group ofcompany employees recommended that CSC switch to activity-basedcosting and identified the following activities, cost drivers,estimated costs, and estimated cost driver units for Year 5 foreach activity center.
| Activity | Recommended
Cost Driver | Estimated
Cost | Estimated Cost
Driver Units |
| Setting up production | Number of production runs | $ | 36,000 | | 120 | runs | |
| Processing orders | Number of orders | | 46,800 | | 180 | orders | |
| Handling materials | Pounds of materials | | 14,000 | | 7,000 | pounds | |
| Using machines | Machine-hours | | 48,000 | | 8,000 | hours | |
| Providing quality management | Number of inspections | | 48,000 | | 40 | inspections | |
| Packing and shipping | Units shipped | | 40,000 | | 20,000 | units | |
| | $ | 232,800 | | | | |
|
In addition, management estimated 2,000 direct labor-hours foryear 5.
Assume that the following cost driver volumes occurred inFebruary, year 5.
| Short | Medium | Tall |
| Number of units produced | | 900 | | | 600 | | | 500 | |
| Direct materials costs | $ | 5,000 | | $ | 2,500 | | $ | 2,000 | |
| Direct labor-hours | | 90 | | | 110 | | | 110 | |
| Number of orders | | 8 | | | 8 | | | 5 | |
| Number of production runs | | 1 | | | 4 | | | 9 | |
| Pounds of material | | 400 | | | 700 | | | 200 | |
| Machine-hours | | 600 | | | 400 | | | 200 | |
| Number of inspections | | 2 | | | 1 | | | 2 | |
| Units shipped | | 900 | | | 600 | | | 400 | |
|
Direct labor costs were $20 per hour.
Required:
a. Compute a predetermined overhead rate foryear 5 for each cost driver recommended by the employees. Alsocompute a predetermined rate using direct labor-hours as theallocation base.
b. Compute the production costs for each productfor February using direct labor-hours as the allocation base andthe predetermined rate computed in requirementa.
c. Compute the production costs for each productfor February using the cost drivers recommended by the employeesand the predetermined rates computed in requirementa. (Note: Do not assume that totaloverhead applied to products in February will be the same foractivity-based costing as it was for the labor-hour-basedallocation.)
