Kitchen Supply Inc KSI manufactures three types of flatware

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 8,000 direct labor-hours for year 2.

Assume that the following cost driver volumes occurred in January, year 2:

Actual labor costs were $14 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.)

(2) Compute a predetermined rate for year 2 using direct labor-hours as the allocation base. (Round your answer to 2 decimal places.)

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	Recommended Cost Driver	Estimated Cost	Estimated Cost Driver Activity
Processing orders	Number of orders	$	45,000		200	orders
Setting up production	Number of production runs		198,000		110	runs
Handling materials	Pounds of materials used		275,000		110,000	pounds
Machine depreciation and maintenance	Machine-hours		234,000		13,000	hours
Performing quality control	Number of inspections		65,000		50	inspections
Packing	Number of units		125,000		500,000	units
Total estimated cost		$	942,000

Solution

STATEMENT SHOWING ACTIVITY RATE OF ACTIVITY POOL Activity Total Expected Activity ACTIVITY COST POOL Measures Overheads Activity Rate Processing orders Order 45000 200 225 Setting up production Prod. Runs 198000 110 1800 handling material Pounds 275000 110000 2.5 Machine dep MH 234,000 13,000 18 Performing Quality control Inspections 65,000 50 1300 packing Units 125,000 500,000 0.25 Req 2: Estimated OH 942000 Divided: Estimated labour hours 8000 OH rate per DLH 117.75 Req b: Production cost Institution Standard Silver Matrial 37000 21,000 17,000 Labour @ 14 6440 5,600 8,820 OH cost @ 117.75 54165 47,100 74,183 Total Production cost 97605 73700 100,003 Rreq c: Institution Standard Silver Matrial 37000 21,000 17,000 Labour @ 14 6440 5,600 8,820 OH applied Processing order @ 225 per order 2925 2250 1,350 Setting up @ 1800 5400 7200 9000 Handling @ 2.50 30000 12500 6,250 machine dep@ 18 10440 2340 1,260 Quality conttrol @ 1300 3900 3900 5,200 Packing @ 0.25 per unit 14250 6500 2500 Total Production cost 110355 61290 51,380