Kitchen Supply, Inc. (KSI), manufactures three types offlatware: institutional, standard, and silver. It applies allindirect costs according to a predetermined rate based on directlabor-hours. A consultant recently suggested that the companyswitch to an activity-based costing system and prepared thefollowing cost estimates for year 2 for the recommended costdrivers.
| Activity | Recommended
Cost Driver | Estimated
Cost | Estimated Cost
Driver Activity |
| Processing orders | Number of orders | $ | 40,250 | | 175 | orders | |
| Setting up production | Number of production runs | | 160,000 | | 80 | runs | |
| Handling materials | Pounds of materials used | | 242,000 | | 110,000 | pounds | |
| Machine depreciation and maintenance | Machine-hours | | 220,000 | | 11,000 | hours | |
| Performing quality control | Number of inspections | | 44,450 | | 35 | inspections | |
| Packing | Number of units | | 98,000 | | 490,000 | units | |
| Total estimated cost | | $ | 804,700 | | | | |
|
In addition, management estimated 7,100 direct labor-hours foryear 2.
Assume that the following cost driver volumes occurred inJanuary, year 2.
| Institutional | Standard | Silver |
| Number of units produced | | 64,000 | | | 25,000 | | | 7,000 | |
| Direct materials costs | $ | 42,000 | | $ | 22,000 | | $ | 17,000 | |
| Direct labor-hours | | 410 | | | 430 | | | 620 | |
| Number of orders | | 11 | | | 9 | | | 6 | |
| Number of production runs | | 3 | | | 3 | | | 6 | |
| Pounds of material | | 14,000 | | | 6,000 | | | 2,900 | |
| Machine-hours | | 560 | | | 150 | | | 60 | |
| Number of inspections | | 4 | | | 2 | | | 3 | |
| Units shipped | | 64,000 | | | 25,000 | | | 7,000 | |
|
Actual labor costs were $16 per hour.
Required:
a.
(1) Compute a predetermined overhead rate foryear 2 for each cost driver using the estimated costs and estimatedcost driver units prepared by the consultant.
(2) Compute a predetermined rate for year 2 usingdirect labor-hours as the allocation base.
Processing orders: Rate per order?
Setting up Production: Rate per run?
Handling Materials: Rate per pound?
Using Machines: Rate per machine hour?
Performing Quality Control: Rate per Inspection?
Packing: Rate per unit?
a2. Predetermined Rate per direct labor-hour?
b. Compute the production costs for each productfor January using direct labor-hours as the allocation base and thepredetermined rate computed in requirementa(2).
Direct Labor for: Institutional? Standard? Silver?
Indirect Costs for: Instituional? Standard? Silver?
c. Compute the production costs for each productfor January using the cost drivers recommended by the consultantand the predetermined rates computed in requirementa. (Note: Do not assume that totaloverhead applied to products in January will be the same foractivity-based costing as it was for the labor-hour-basedallocation.)
Institutional Standard Silver
Direct Labor?
Processing Orders?
Setting up Production?
Handling Materials?
Using Machines?
Performing Quality Control?
Packing?
