Luxury Furniture designs and builds factory-made, premium, wood armoires for homes. All are of white oak. Its budgeted manufacturing overhead costs for the year 2017 are as follows.

Overhead Cost Pools

Amount

Purchasing

$ 45,000

Handling materials

50,000

Production (cutting, milling, finishing)

130,000

Setting up machines

85,000

Inspecting

60,000

Inventory control (raw materials and finished goods)

80,000

Utilities

100,000

Total budgeted overhead costs

$550,000

For the last 4 years, Luxury Furniture has been charging overhead to products on the basis of materials cost. For the year 2017, materials cost of $500,000 were budgeted. Jim Brigham, owner-manager of Luxury Furniture, recently directed his accountant, Bob Borke, to implement the activity-based costing system that he has repeatedly proposed. At Jim Brigham’s request, Bob and the production foreman identify the following cost drivers and their usage for the previously budgeted overhead cost pools.

Overhead Cost Pools

Activity Cost Drivers

Expected
Use of
Cost Drivers

Purchasing

Number of orders

500

Handling materials

Number of moves

5,000

Production (cutting, milling, finishing)

Direct labor hours

65,000

Setting up machines

Number of setups

1,000

Inspecting

Number of inspections

4,000

Inventory control (raw materials and finished goods)

Number of components

40,000

Utilities

Square feet occupied

50,000

Debbie Steiner, sales manager, has received an order for 12 luxury armoires from Thom’s Interior Design. At Debbie’s request, Bob prepares cost estimates for producing 12 armoires so Debbie can submit a contract price per armoire to Thom’s. He accumulates the following data for the production of 12 armoires.

Direct materials

$5,200

Direct labor

$3,500

Direct labor hours

200

Number of purchase orders

3

Number of material moves

32

Number of machine setups

4

Number of inspections

20

Number of components

640

Number of square feet occupied 320

Instructions:

(a) Compute the predetermined overhead rate using traditional costing with materials cost as the basis.

(b) What is the manufacturing cost per armoire under traditional costing?

(c) What is the manufacturing cost per armoire under the proposed activity-based costing? (Prepare all of the necessary schedules.)

(d) Which of the two costing systems is preferable in pricing decisions and why?