Assessment 3 Part 2: Activity-Based Costing and Predetermined Overhead Allocation Rates Scenario: Bath Fixtures Supply, Inc. (BFSI), manufactures three types of fixtures: industrial, standard, and brass. 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. Activity Handling materials Machine depreciation and maintenance Performing quality control Recommended Cost Driver Pounds of materials used Machine-hours Number of inspections Number of units Packing Total estimated cost 2 3 4 In addition, management estimated 7,500 direct labor-hours for year 2. Estimated Cost Driver Activity Estimated Cost $396,000 132,000 pounds 316,800 13,200 hours 79,200 45 inspections 158,400 480,000 units $1,247,400 6 Assume that the following cost driver volumes occurred in January, year 2 7 8 Number of units produced Industrial Standard Brass 66,000 26,400 9,900 Direct materials costs $42,900 $26,400 $16,500 Direct labor-hours 450 60 450 600 1 Number of orders 12 9 6 Number of production runs 3 3 6 3 Pounds of material 16,500 6,600 3,300 Machine-hours 638 140 Number of inspections 3 3 80 3 Units shipped 66,000 26,400 9,900 Actual labor costs were $15 per hour. 9 REQUIRED O 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. Also compute a predetermined rate for 1 year 2 using direct labor-hours as the allocation base. 2 3 4 5 6 7 8 44 45 2. Compute the production costs for each product for January using direct labor-hours as the allocation base and the predetermined rate computed in requirement (1). 46 47 48 49 50 1151 52 23 53 3. Compute the production costs for each product for January using the cost drivers recommended by the consultant and the predetermined rates computed in requirement (1). (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.) 54 55 56 57 58 59 60 61 62 57 4. 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. 89 68