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.