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 Activity Recommended Estimated Estimated Cost
Cost Driver Cost Driver Activity
Processing orders Number of orders $ 52,875 225 orders
Setting up production Number of production runs 228,000 120 runs
Handling materials Pounds of materials used 264,000 120,000 pounds
Machine depreciation
and maintenance Machine-hours 231,000 11,000 hours
Performing quality control Number of inspections 54,400 40 inspections
Packing Number of units 112,500 450,000 units
Total estimated cost $ 942,775
in addition, management estimated 7,100 direct labor-hours for year 2.
Assume that the following cost driver volumes occurred in January, year 2:
Number of units produced 63,000 25,000 8,000
Direct materials costs $ 35,000 $ 22,000 $ 15,000
Direct labor-hours 470 460 590
Number of orders 13 8 6
Number of production runs 3 3 6
Pounds of material 18,000 6,000 3,000
Machine-hours 610 120 80
Number of inspections 2 3 3
Units shipped 63,000 25,000 8,000
Actual labor costs were $15 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.)
Processing orders- per order
setting up production-per run
handing materials- per pound
using machines-per machine
performing quality control-per inspection
Packing-per unit
(2) Compute a predetermined rate for year 2 using direct labor-hours as the allocation base. (Round your answer to 2 decimal places.)
Predetermined rate per direct labor hour
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.)
Accounts Institutional standard silver total
Direct Materials 35000 22000 15000 72000
Direct Labor
Indirect costs
Total cost
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.)
Account Institutional standard silver Total
Direct materials 35,000 22,000 15,000 72,000
Direct labor
Indirect costs
Processing orders
setting up production
handling materials
using machines
performing quality control
packing
total cost