Kitchen Supply, Inc. – Overhead allocation on traditional and ABC basis

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Description

 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 170,000 100 runs

Handling materials Pounds of materials used 364,000 130,000
pounds Machine depreciation and

maintenance Machine-hours 209,000 11,000 hours Performing

quality control Number of inspections 47,600 35 inspections

Packing Number of units 147,000 490,000 units

Total estimated cost $
982,600

In addition, management estimated 7,300 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 58,000 23,000 10,000

Direct materials costs
$ 40,000 $ 23,000 $ 16,000

Direct labor-hours 410 470 570

Number of orders 11 8 5

Number of production
runs 3 2 6

Pounds of material 16,000 5,000 3,300

Machine-hours 580 150 70

Number of inspections
3 3 3

Units shipped 58,000 23,000 10,000

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. (Round your answers to 2 decimal places.)

(2) Compute a predetermined rate for year 2 using direct
labor-hours as the allocation base. (Round your answer to 2 decimal places.)

(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). (Round “Indirect costs” to the
nearest dollar.)

(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.)

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