Kitchen Supply, Inc. (KSI), manufactures three types of flatware: institutional,
ID: 2516700 • Letter: K
Question
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.
In addition, management estimated 7,500 direct labor-hours for year 2.
Assume that the following cost driver volumes occurred in January, year 2:
Actual labor costs were $15 per hour.
Required
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. Also compute a predetermined rate for year 2 using direct labor-hours as the allocation base.
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).
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.)
Management has seen your numbers and wants an explanation for the discrepancy between the product costs using direct labor-hours as the allocation base and the product costs using activity-based costing. Write a brief response to management.
Activity Recommended Cost Driver Estimated Cost Estimated Cost Driver Activity Processing orders Number of orders $ 54,000 200 orders Setting up production Number of production runs 216,000 100 runs Handling materials Pounds of materials used 360,000 120,000 pounds Machine depreciation and maintenance Machine-hours 288,000 12,000 hours Performing quality control Number of inspections 72,000 45 inspections Packing Number of units 144,000 480,000 units Total estimated cost $1,134,000 KITCHEN SUPPLY, INC Part a. Estimated Activity Cost Driver Costs Driver Units Rate Processing orders Setting up production Handling materials Using machines Performing quality control Packing Total estimated overhead Number of orders Number of runs Pounds Machine hours 200 orders S 54,000 216,000 100 runs 360,000120,000 pounds 288,000 72,000 144,000 S 1,134,000 12,000 hours Number of inspections 45 inspections Number of units 480,000 units Estimated activity Estimated allocation base Predetermined rate for direct labor-hour S 1,134,000 #0N101 Part b Production costs using direct labor hour Account Direct materials Direct labor Institutional Standard Silver Total Indirect costs Total cost Try again Try agan ry againt Part c. 4 Production costs using AB Account Institutional Standard Silver Total 7 Direct materials Direct labor 9 Indirect costs: Processing orders Setting up production Handling materials 3 Using machines 4 Performing quality control 5 Packing 6 Total costExplanation / Answer
a) Estimated Driver rate 1) cost (a) (b) c=a/b processing orders 54,000 200 270 per order Setting up production 216,000 100 2160 per run handling materials 360,000 120,000 3 per pound using machines 288,000 12,000 24 per mh performing quality control 72,000 45 1600 per inspection packing 144,000 480,000 0.3 per unit Estimated activity 1,134,000 estimated allocation base 7,500 predetermined rate for direct labor 151.2 production cost using direct labor hours institutional standard Silver total b) Account Direct materials 39000 24000 9000 72000 direct labor 6750 6750 9000 22500 indirect costs 68040 68040 90720 226800 total cost 113790 98790 108720 321300 direct labor = DLH*$15 per hour indirect cost = dLH*$151.20 c) institutional standard Silver total Account Direct materials 39000 24000 9000 72000 direct labor 6750 6750 9000 22500 Indirect costs processing orders 3240 2430 1620 7290 Setting up production 6480 6,480 12960 25920 handling materials 45000 18000 9000 72000 using machines 13920 3360 1920 19200 performing quality control 4800 4,800 4800 14400 packing 18000 7200 2700 27900 total cost 137190 73020 51000 261210
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