Kitchen Supply, Inc. (KSI), manufactures three types of flatware: institutional,

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. Recommended Cost Driver Estimated Cost Driver Activity Estimated $ 49,500 Processing orders Setting up production Handling materials Machine depreciation and maintenance Performing quality control Packing Total estimated cost Number of orders Number of production runs Pounds of materials used Machine-hours Number of inspections Number of units 225 orders 100 runs 110,000 pounds 180,000 242,000 115,000 $948,900 11,000 hours 40 inspections 460,000 units In addition, management estimated 7,000 direct labor-hours for year 2. Assume that the following cost driver volumes occurred in January, year 2: Number of units produced Direct materials costs Direct labor-hours Number of orders Number of production runs Standard $24,000 10 $37,000 $13,000 13,000 Machine-hours Number of inspections Units shipped Actual labor costs were $16 per hour. Required (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 Setting up production Handling materials Using machines Performing quality control Packing r order per machine hour per inspection

Explanation / Answer

Req A 1 Activity Total cost Annual cost drivers Cost per driver Processing orders 49500 225 orders 220 Per order Setting up production 180000 100 runs 1800 per run Handling material 308000 110,000 pounds 2.8 per pound Using machines' 242000 11,000 hours 22 per hour performing Quality control 54400 40 inspections 1360 per inspection Packing 115000 460,000 units 0.25 per unit Req A2: Total overheads   $ 948,900 Direct labour hours 7000 hours Pre dettermined overhead rate = total overheads/ total labour hours     ( 948900/7000) = $ 135.56 per labour hour ReqB Cost of Product based on pre determined rate Institutional Standard Silver TOTAL Direct labour hours 410 470 640 1520 Direct material cost 37000 24000 13000 74000 Direct labour cost @16 per hour 6560 7520 10240 24320 Indirect cost @135.56 per hour 55579.6 63713.2 86758.4 206051.2 TOTAL COST 99139.6 95233.2 109998.4 304371.2 Req C: Product cost based on activity cost drivers Institutional Standard Silver TOTAL Direct labour hours 410 470 640 1520 Number of units produced/ Shipped 56000 21000 9000 86000 Number of orders 11 10 6 27 Number of production runs 4 3 7 14 Pounds of material 13000 6000 2800 21800 Machine hours 590 150 70 810 Number of inspection 3 2 3 8 Direct Material 37000 24000 13000 74000 Direct labour cost@16 per hour 6560 7520 10240 24320 Overhead cost: Processing cost@220 per order 2420 2200 1320 5940 Setting up production@1800 per run 7200 5400 12600 25200 handling material@2.80 per pound 36400 16800 7840 61040 Using machines@22 per hour 12980 3300 1540 17820 Performing Quality check@1360 per inspection 4080 2720 4080 10880 packing @0.25 per unit shipped 14000 5250 2250 21500 Total Cost 120640 67190 52870 240700

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