70.2K

Verified Solution

Link Copied!

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 consul. tant 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. Activity Processing orders Setting up production Handling materials Machine depreciation and maintenance Performing quality control. Packing Recommended Cost Driver Number of orders Number of production runs Pounds of materials used Estimated Estimated Cost Cost Driver Activity $ 54,000 200 orders 216.000 100 runs 360,000 120,000 pounds Machine-hours Number of inspections Number of units 288,000 12.000 hours 72.000 45 inspections 144,000 480.000 units $1,134,000 Total estimated cost...... In addition, management estimated 7.500 direct labor-hours for year 2 Assume that the following cost driver volumes occurred in January, year 2. Standard Silver Number of units produced Direct materials costs Direct labor-hours Number of orders. Number of production runs Pounds of material. Machine-hours Number of inspections Units shipped Institutional 60.000 $39,000 450 12 3 15.000 580 3 60,000 24,000 $24,000 450 9 3 6,000 140 3 24,000 9,000 $15,000 600 6 6 3.000 80 3 9,000 Actual labor costs were $15 per hour. Required a. 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 predeter- mined rate for year 2 using direct labor-hours as the allocation base. 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). Compute the production costs for each product for January using the cost drivers recom- mended 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.) d. 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. c

Answer & Explanation Solved by verified expert

See Answer