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 7,500 direct labor-hours for Year 2.
Assume that the following cost driver volumes occurred in January Year 2:

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 predetermined 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).
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).
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 tomanagement.

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Recommended Cost Driver Estimated Cost Estimated Cost Driver Activity Activity Processing orders.... Number of orders $ 54,000 200 orders Setting up production... Machine depreciation Performing quality control Number of production runs 216,000 100 runs Pounds of materials used Machine-hours Number of units 360,000 120,000 pounds 288,000 12,000 hours Number of in spections 72,000 45 inspections 144,000 480,000 units Packing Total estimated cost $1.134.000 Silver Number of units produced 60,000 $39,000 24,000 $24,000 450 9 3 6,000 140 9,000 $15,000 s costs.. . Direct labor-hours .. Number of orders Pounds of material Machine-hours Number of inspections. Units shipped 12 3 15,000 580 3 60,000 6 6 3,000 80 3 9,000 24,000