Kitchen Kabinets Company designs and builds upscale kitchen cabinets for luxury homes. Many of the kitchen cabinet and counter arrangements are custom made, but occasionally the company does mass production on order. Its budgeted manufacturing overhead costs for the year 2011 are as follows.

For the last 3 years, Kitchen Kabinets Company has been charging overhead to products on the basis of machine hours. For the year 2011, 100,000 machine hours are budgeted.
Ben Chen, the owner-manager, recently directed his accountant, John Kandy, to implement the activity-based costing system he has repeatedly proposed. At Ben's request, John and the production foreman identify the following cost drivers and their usage for the previously budgeted overhead cost pools.

Sara Sosa, sales manager, has received an order for 50 kitchen cabinet arrangements from Bitty Builders, a housing development contractor. At Sara's request, John prepares cost estimates for producing components for 50 cabinet arrangements so Sara can submit a contract price per kitchen arrangement to Bitty Builders. He accumulates the following data for the production of 50 kitchen cabinet arrangements.

Instructions:

(a) Compute the predetermined overhead rate using traditional costing with machine hours as the basis.

(b) What is the manufacturing cost per complete kitchen arrangement under traditional costing?

(c) What is the manufacturing cost per kitchen arrangement under the proposed activitybased costing? (Prepare all of the necessary schedules.)

(d) Which of the two costing systems is preferable in pricing decisions and why?
Assign overhead costs using traditional costing and \(A B C\); compare results.
\((\$ 01,4)\)

Transcribed Image Text:

Overhead Cost Pools Purchasing Handling materials Production (cutting, milling, finishing) Setting up machines Amount $ 114,400 164,320 500,000 174,480 Inspecting 184,800 Inventory control (raw materials and finished goods) 252,000 Utilities 360,000 Total budget overhead costs $1,750,000