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Problem 17-3A (Part Level Submission)
Shaker Stairs Co. designs and builds factory-made premium wooden stairways for homes. The manufactured stairway components (spindles, risers, hangers, hand rails) permit installation of stairways of varying lengths and widths. All are of white oak wood. Budgeted manufacturing overhead costs for the year 2017 are as follows.
| Overhead Cost Pools | Amount | |
| Purchasing | $73,800 | |
| Handling materials | 82,160 | |
| Production (cutting, milling, finishing) | 221,000 | |
| Setting up machines | 96,250 | |
| Inspecting | 96,000 | |
| Inventory control (raw materials and finished goods) | 131,040 | |
| Utilities | 450,000 | |
| Total budgeted overhead costs | $1,150,250 |
For the last 4 years, Shaker Stairs Co. has been charging overhead to products on the basis of machine hours. For the year 2017, 100,000 machine hours are budgeted.
Jeremy Nolan, owner-manager of Shaker Stairs Co., recently directed his accountant, Bill Seagren, to implement the activity-based costing system that he has repeatedly proposed. At Jeremy Nolan’s request, Bill and the production foreman identify the following cost drivers and their usage for the previously budgeted overhead cost pools.
| Activity Cost Pools | Cost Drivers | Expected Use of Cost Drivers |
||
| Purchasing | Number of orders | 600 | ||
| Handling materials | Number of moves | 8,000 | ||
| Production (cutting, milling, finishing) | Direct labor hours | 100,000 | ||
| Setting up machines | Number of setups | 1,250 | ||
| Inspecting | Number of inspections | 6,000 | ||
| Inventory control (raw materials and finished goods) | Number of components | 168,000 | ||
| Utilities | Square feet occupied | 90,000 |
Steve Hannon, sales manager, has received an order for 250 stairways from Community Builders, Inc., a large housing development contractor. At Steve’s request, Bill prepares cost estimates for producing components for 250 stairways so Steve can submit a contract price per stairway to Community Builders. He accumulates the following data for the production of 250 stairways.
| Direct materials | $104,200 | |
| Direct labor | $112,200 | |
| Machine hours | 15,300 | |
| Direct labor hours | 5,300 | |
| Number of purchase orders | 60 | |
| Number of material moves | 800 | |
| Number of machine setups | 100 | |
| Number of inspections | 450 | |
| Number of components | 16,000 | |
| Number of square feet occupied | 8,000 |
a) Compute the predetermined overhead rate using traditional costing with machine hours as the basis.
(b) What is the manufacturing cost per stairway under traditional costing?
(c) What is the manufacturing cost per stairway under the proposed activity-based costing?(Prepare all of the necessary schedules.)
(d) Which of the two costing systems is preferable in pricing decisions and why?
Expert Answer
| Answer a. | |||||
| Traditional Costing | |||||
| Predetermined Overhead Rate = $1,150,250 (Total Overhead) / 100,000 Mach. Hrs | |||||
| Predetermined Overhead Rate = $11.5025 per Mach. Hr. | |||||
| Answer b. | |||||
| Caculation of Unit Cost | |||||
| Under Traditional Costing | |||||
| Amount | |||||
| Direct Material | 104,200.00 | ||||
| Direct Labor | 112,200.00 | ||||
| Overhead – 15,300 Mach Hrs X $11.5025 | 175,988.25 | ||||
| Total Cost | 392,388.25 | ||||
| No. of Stairways Produced | 250.00 | ||||
| Cost Per Stairway | 1,569.55 | ||||
| Answer c. | |||||
| ABC Costing | |||||
| Activity | Overhead | Cost Driver Quantity | Allocation Rate | ||
| Purchasing | 73,800 | 600 | Orders | 123.00 | Per order |
| Handling Materials | 82,160 | 8,000 | moves | 10.27 | Per move |
| Production (cutting, milling, finishing) | 221,000 | 100,000 | Lab Hrs | 2.21 | Per Lab Hr. |
| Setting up machines | 96,250 | 1,250 | Setups | 77.00 | Per setup |
| Inspecting | 96,000 | 6,000 | Inspections | 16.00 | Per Inspection |
| Inventory control (raw materials and finished goods) | 131,040 | 168,000 | components | 0.78 | per component |
| Utilities | 450,000 | 90,000 | Square Feet | 5.00 | per sq feet |
| Total | 1,150,250 | ||||
| Calculation of Overhead | |||||
| Under ABC Costing | |||||
| Purchasing | 7,380 | ||||
| Handling Materials | 8,216 | ||||
| Production (cutting, milling, finishing) | 11,713 | ||||
| Setting up machines | 7,700 | ||||
| Inspecting | 7,200 | ||||
| Inventory control (raw materials and finished goods) | 12,480 | ||||
| Utilities | 40,000 | ||||
| Total | 94,689 | ||||
| Calculation of Cost Per Unit | |||||
| Under ABC Costing | |||||
| Direct Material | 104,200.00 | ||||
| Direct Labor | 112,200.00 | ||||
| Overhead – 15,300 Mach Hrs X $11.5025 | 94,689.00 | ||||
| Total Cost | 311,089.00 | ||||
| No. of Stairways Produced | 250.00 | ||||
| Cost Per Stairway | 1,244.36 | ||||
| Answer c. | |||||
| ABC method provides information in more detail, this information will allow managers to make a better decision when it comes to pricing. ABC is more accurate because it has more cost pools, which in terms, allows to have managers assign the necessary overhead cost. | |||||
