Kitchen Supply, Inc. (KSI), manufactures three types of flatware: institutional,
ID: 2548244 • 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 7,400 direct labor-hours for year 2.
Assume that the following cost driver volumes occurred in January, year 2:
Actual labor costs were $16 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.)
Activity Rate
(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.)
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.)
Activity RecommendedCost Driver Estimated
Cost Estimated Cost
Driver Activity Processing orders Number of orders $ 42,000 175 orders Setting up production Number of production runs 187,000 110 runs Handling materials Pounds of materials used 300,000 120,000 pounds Machine depreciation and maintenance Machine-hours 216,000 12,000 hours Performing quality control Number of inspections 73,150 55 inspections Packing Number of units 127,500 510,000 units Total estimated cost $ 945,650
Explanation / Answer
Answer
Working
Activity
Recommended
Estimated
Estimated Cost
Activity rate [A/B]
Cost Driver
Cost [A]
Driver Activity [B]
Processing orders
Number of orders
42,000
175
orders
$240
Setting up production
Number of production runs
1,87,000
110
runs
$1700
Handling materials
Pounds of materials used
3,00,000
1,20,000
pounds
$2.5
Machine depreciation and maintenance
Machine-hours
2,16,000
12,000
hours
$18
Performing quality control
Number of inspections
73,150
55
inspections
$1330
Packing
Number of units
1,27,500
5,10,000
units
$0.25
Total estimated cost
$9,45,650
Answer
Activity
Rate
Processing Orders
$ 240.00
Per Order
Setting up production
$ 1,700.00
Per Run
Handling materials
$ 2.50
Per pound
Using machines
$ 18.00
per machine hour
Performing quality control
$ 1,330.00
per inspection
Packing
$ 0.25
per unit
Total Estimated Cost (A)
$945650
Total Direct labor hours (B)
7400
Predetermined rate using direct labor hour as allocation base (A/B)
$127.79 per direct labor hour
Working for Indirect cost
Institutional
Standard
Silver
Direct Labor Hours
410
480
620
Predetermined rate per DLhs
$127.79
$127.79
$127.79
Overhead allocated
$52393.9
$61339.2
$79229.8
Answer
Account
Institutional
Standard
Silver
Total
Direct Materials
$ 39,000.00
$ 23,000.00
$ 13,000.00
$ 75,000.00
Direct Labor [DLHs x $16 per hour]
$ 6,560.00
$ 7,680.00
$ 9,920.00
$ 24,160.00
Indirect Cost
$ 52,393.90
$ 61,339.20
$ 79,229.80
$ 1,92,962.90
Total Cost
$ 97,953.90
$ 92,019.20
$ 1,02,149.80
$ 2,92,122.90
Working
Institutional
No. of drivers
Activity Rates per drivers
Overhead Allocated
Number of orders
12
$ 240.00
$ 2,880.00
Number of production runs
3
$ 1,700.00
$ 5,100.00
Pounds of material
13,000
$ 2.50
$ 32,500.00
Machine-hours
610
$ 18.00
$ 10,980.00
Number of inspections
2
$ 1,330.00
$ 2,660.00
Units shipped
59,000
$ 0.25
$ 14,750.00
Standard
No. of drivers
Activity Rates per drivers
Overhead Allocated
Number of orders
10
$ 240.00
$ 2,400.00
Number of production runs
4
$ 1,700.00
$ 6,800.00
Pounds of material
5,000
$ 2.50
$ 12,500.00
Machine-hours
150
$ 18.00
$ 2,700.00
Number of inspections
3
$ 1,330.00
$ 3,990.00
Units shipped
28,000
$ 0.25
$ 7,000.00
Silver
No. of drivers
Activity Rates per drivers
Overhead Allocated
Number of orders
5
$ 240.00
$ 1,200.00
Number of production runs
5
$ 1,700.00
$ 8,500.00
Pounds of material
3,000
$ 2.50
$ 7,500.00
Machine-hours
80
$ 18.00
$ 1,440.00
Number of inspections
4
$ 1,330.00
$ 5,320.00
Units shipped
9,000
$ 0.25
$ 2,250.00
Answer
Account
Institutional
Standard
Silver
Total
Direct Material
$ 39,000.00
$ 23,000.00
$ 13,000.00
$ 75,000.00
Direct Labor
$ 6,560.00
$ 7,680.00
$ 9,920.00
$ 24,160.00
Indirect Costs:
Processing Orders
$ 2,880.00
$ 2,400.00
$ 1,200.00
$ 6,480.00
Setting up production
$ 5,100.00
$ 6,800.00
$ 8,500.00
$ 20,400.00
Handling materials
$ 32,500.00
$ 12,500.00
$ 7,500.00
$ 52,500.00
Using machines
$ 10,980.00
$ 2,700.00
$ 1,440.00
$ 15,120.00
Performing quality control
$ 2,660.00
$ 3,990.00
$ 5,320.00
$ 11,970.00
Packing
$ 14,750.00
$ 7,000.00
$ 2,250.00
$ 24,000.00
Total Cost
$ 1,14,430.00
$ 66,070.00
$ 49,130.00
$ 2,29,630.00
Activity
Recommended
Estimated
Estimated Cost
Activity rate [A/B]
Cost Driver
Cost [A]
Driver Activity [B]
Processing orders
Number of orders
42,000
175
orders
$240
Setting up production
Number of production runs
1,87,000
110
runs
$1700
Handling materials
Pounds of materials used
3,00,000
1,20,000
pounds
$2.5
Machine depreciation and maintenance
Machine-hours
2,16,000
12,000
hours
$18
Performing quality control
Number of inspections
73,150
55
inspections
$1330
Packing
Number of units
1,27,500
5,10,000
units
$0.25
Total estimated cost
$9,45,650
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