Thakin Stairs Co. designs and builds factory-made premium wooden stairways for h
ID: 2424953 • Letter: T
Question
Thakin Stairs Co. designs and builds factory-made premium wooden stairways for homes. The manufactured stairway components (spindles, risers, hangers, hand rails) permit installation of stairways of varying lengths and widths. All are of white oak wood. Budgeted manufacturing overhead costs for the year 2014 are as follows.
Overhead Cost Pools
Amount
180,000
$852,000
For the last 4 years, Thakin Stairs Co. has been charging overhead to products on the basis of machine hours. For the year 2014, 100,000 machine hours are budgeted.
Jeremy Nolan, owner-manager of Thakin Stairs Co., recently directed his accountant, Bill Seagren, to implement the activity-based costing system that he has repeatedly proposed. At Jeremy Nolan's request, Bill and the production foreman identify the following cost drivers and their usage for the previously budgeted overhead cost pools.
Activity Cost Pools
Cost Drivers
Expected Use of Cost Drivers
Steve Hannon, sales manager, has received an order for 250 stairways from Community Builders, Inc., a large housing development contractor. At Steve's request, Bill prepares cost estimates for producing components for 250 stairways so Steve can submit a contract price per stairway to Community Builders. He accumulates the following data for the production of 250 stairways.
Instructions
Compute the predetermined overhead rate using traditional costing with machine hours as the basis.
What is the manufacturing cost per stairway under traditional costing? (Round to the nearest cent.)
Cost/stairway $1,356.56
What is the manufacturing cost per stairway under the proposed activity-based costing? (Round to the nearest cent. Prepare all of the necessary schedules.)
Cost/stairway $1,134.20
Which of the two costing systems is preferable in pricing decisions and why?
Assign overhead costs using traditional costing and ABC
Overhead Cost Pools
Amount
Purchasing $ 69,000 Handling materials 82,000 Production (cutting, milling, finishing) 210,000 Setting up machines 95,000 Inspecting 90,000 Inventory control (raw materials and finished goods) 126,000 Utilities180,000
Total budgeted overhead costs$852,000
Explanation / Answer
a. Predetermined overhead rate = Budgeted Overheads /Budgeted Machine hours
= $852000/ 100000
= $8.52
b. Cost per stairway:
c. Calculation of cost per driver:
Manufacturing Cost per stairway:
3. ABC is preferable over traditional costing system.
Total Cost for 250 stairways Cost per stairway Materials 103600 414.40 Labor 112000 448.00 Overheads 8.52 x 14500 = 123540 494.16 Total Cost 1356.56Related Questions
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