Kitchen King’s Toledo plant manufactures three product lines, all multi-burner, ceramic cook tops. The plant’s three product models are the Regular (REG). the Advanced (ADV), and the Gourmet (GMT). Until recently, the plant used a job-order product-costing system, with manufacturing overhead applied on the basis of direct-labor hours. The following table displays the basic data upon which the traditional costing system was based.

The annual budgeted overhead is $1,224,000, and the company’s predetermined overhead rate is $12 per direct-labor hour. The product costs for the three product models, as reported under the plant’s traditional costing system, are shown in the following table.

Kitchen King’s pricing policy is to set a target price for each product equal to 130 percent of the full product cost. Due to price competition from other appliance manufacturers, REG units were selling at $525, and ADV units were selling for $628. These prices were somewhat below the firm’s target prices. However, these results were partially offset by greater-than-expected profits on the GMT product line. Management had raised the price on the GMT model to $800, which was higher than the original target price. Even at this price, Kitchen King’s customers did riot seem to hesitate to place orders, Moreover, the company’s competitors did not mount a challenge in the market for the GMT product line. Neverthless, concern continued to mount in Toledo about the difficulty in the REG and ADV markets. After all, these were the plant’s bread- and-butter products, with projected annual sales of 5,000 REG units and 4,000 ADV units.

Kitchen King’s director of cost management. Angela Ramirez, had been thinking for sonic time about a refinement in the Toledo plant’s product-costing system. Ramirez wondered if the traditional, volume-based system was providing management with accurate data about product costs. She had read about activity-based costing, and wondered if ABC would be an improvement to the plant’s product costing system. After some discussion, an ABC proposal was made to the company’s top management, and approval was obtained. The data collected for the new ABC system is displayed in the following table.

Required:
1. Show how the company's overhead rate of $12 per direct-labor hour was calculated.
2. Complete an activity-based costing analysis for Kitchen King's three product lines. Display the results of your ABC analysis in a table similar to Exhibit (a) in the text.
Exhibit (a)

3. Prepare a table similar to Exhibit (b), which computes the new product cost for each product line under ABC.
Exhibit (b)

4. Prepare a table similar to Exhibit (c), which compares the overhead cost, total product cost, and target price for each product line under the two alternative costing systems.
Exhibit (c)

5. Was each of Kitchen King's three product lines overcosted or undercosted? By how much per unit?

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REG ADV GMT Planned annual production: Volume in unit5,000 Production runs 40 runs of 125 unis 4,000 40 runs of 100 units $151 1,000 20 runs of 50 units $203 Direct material $129 Direct labor: Machine hours (MH) Total machine hours consumed not incltuding setup. $171 (9 hrs.$ 9 per hr) $209(11 hrs.$19 per hr) $247 (13 hrs. $19 per hr) per product unit10 M by product line in a year .50,000 (10 MH x 5,000) 48,000 (12 MHx 4,000) 17.000 (17 MH x 1,000) 12 MH 17 MH REG ADV GMT a$123.00 $151.00 $203.00 Direct material.. Direct labor (not including set-up time) Manufacturing overhead108.00 (9 hr.$12) 132.00 (11 hr.$12) 156.00 (13 hr@$12) Total.. 171.00 (9hr.$19 209.00 (11 hr. $19) 247.00 (13 hr.@$19) . $408.00 $492.00 $606.00 Cost Driver Activity Cost Pool Cost Product Quantity for Driver Line Product Line Activity Machine related. $310,500 Machine REG ADV GMT Total 50,000 48,000 17,000 115,000 40 40 20 100 Hours Material handling 2500 roduction REG ADV Runs Total Cost Driver Activity Cost Pool Cost Product Quantity for Driver Activity Line Product Line Purchasing.75,000 Purchase REG ADV GMT Orders 104 Total Setup85,000 Production REG ADV GMT 85,000 40 20 100 400 Inspection00 Inspection REG GMT Total 66,000 Shipments REG 400 1,100 Shipping,n 400 200 1,100 ADV Total Engineerirg32,500 Engineering REG ADV Hours 200 Total 50,000 48,000 17,000 115,000 Facility 575,000 Machine ADV GMT Total Hours E Microsoft Excel Activity Based Costing Data and Calculations Tipe a aestion for help- × ” Activity Product Cost for Activity Cost Driver Cost Line Driver Pool Product Quantity tor Product Production per Unit f Produ Line Product LineLine Activity Driver Quantity Rate Volume chine 1.242000 Machine230,000 5 44OSTD 4.00 100.000 96,000 4,000 540,000 183.000 230,000 1,242.000 91.80 Tosal 210.000 Production2 200 1.050.00 DEL 84,000 42.000 200 210,000 100,000 Runs 1.0 Total 14 Purchasing 300,000 Purchase0050000 STO 10.00 DEL 04.000 00,000 136,000 Materia 340,000 Production 200 1,700.0 10,000 2,000 200 340,000 40,000 0 00D 0,400 110,000 120,000 96,000 48,000 Hours DEL 15.00 264,000 Shipments2,200120.00STD 10.000 Shipping 24.00 Tocal 3 Engineering130,000 Engineering 1300 100.00 STD 2.000 0,000 130,000 100,0001000,000 960,000 4,000340,000 230,000 2.300,o00 20.00 Tota 34 Facility 2,300,000 Machine 230,000 10.00 10,000 100.00 Hours 96,000 2,000 170.00 Total 39 Grand Total $ 4896,000 Grand Total 4 896,000 l4 4ト叭Sheet1/ Sheet2 Sheet3 / lc E3 Microsoft Excel Product Costs from Activity Based Costing System Type a ques ben for help -a × SUMiG9 G16) STD $100.00 180.00 (9hr. $20) 220.0(11 hr.@ $20) 260.00 (13 hr.@ $20) DEL ULT 3 Direct material 4 Direct labor 5 not including set-up time) 6 Total direct costs per unit $120.0) $180.00 $280.00 S340.00 $440.00 8 Manufacturing overhead (based on ABC 9 Machine-related t0 Setup 11 Purchasing 12 Material handling 13Qulity assurance 14 Packing/shipping 15 Engineering design 16 Facility 17 Total ABC overhead cost per unit 18 Total product cost per unit 19 201·ABC overhead costs from Exhibit 5.7 54.00 8.40 10.00 13.60 4.00 12.00 5.00 100.00 s64.80 10.50 12.00 17.00 5.00 12.00 5.00 120.00 S 91.80 21.00 52.00 34.00 15.00 24.00 20.00 170.00 4280 Sheet1 Sheet2 Sheet3/ Reported unit overhead cost: Traditional, volume-based costing system (Exhibit 5-2) Acivity-based costing system (Exhibit 5-8) $216.00 $264.00 31200 207.00 246.30 427.80 Reported unit product cost (direct material, direct labor, and overhead): Traditional, volume-based costing system (Exhibit 5-2) Activity-based costing system Exhibit 5-8) 496.00 64.00 75200 487.00 586.30 867.80 m Sales price data: Original target price (120% of product cost based on traditional, volume-based costing system (Exhibit 5-3)... 595.20 724.80 902.40 New target price (120% of product cost based on actvity-based 594.40 703.56 1,041.36 585,00 705.00 940,00 costing system Actual current selling price (Exhibit 5-3)