Problem 9-57 (Algo) Activity-Based Costing and Predetermined Overhead Allocation Rates (LO 9-3, 5, 6)

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.

Activity	Recommended Cost Driver	Estimated Cost			Estimated Cost Driver Activity
Processing orders	Number of orders	$	45,000		200	orders
Setting up production	Number of production runs		180,000		100	runs
Handling materials	Pounds of materials used		264,000		120,000	pounds
Machine depreciation and maintenance	Machine-hours		216,000		12,000	hours
Performing quality control	Number of inspections		46,550		35	inspections
Packing	Number of units		115,000		460,000	units
Total estimated cost		$	866,550

In addition, management estimated 7,700 direct labor-hours for year 2.

Assume that the following cost driver volumes occurred in January, year 2.

	Institutional			Standard			Silver
Number of units produced		64,000			22,000			11,000
Direct materials costs	$	36,000		$	26,000		$	16,000
Direct labor-hours		450			400			630
Number of orders		11			7			6
Number of production runs		2			2			6
Pounds of material		14,000			7,000			3,300
Machine-hours		590			130			100
Number of inspections		3			2			3
Units shipped		64,000			22,000			11,000

Actual labor costs were $15 per hour.

Required:

a.

(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. (2) 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(2). 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. (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.)