Business, 21.03.2020 02:15, gretchcampbell
Luxury Furniture designs and builds factory-made, premium, wood armoires for homes. All are of white oak. Its budgeted manufacturing overhead costs for the year 2017 are as follows.
Overhead Cost Pools
Amount
Purchasing
$ 45,000
Handling materials
50,000
Production (cutting, milling, finishing)
130,000
Setting up machines
85,000
Inspecting
60,000
Inventory control (raw materials and finished goods)
80,000
Utilities
100,000
Total budgeted overhead costs
$550,000
For the last 4 years, Luxury Furniture has been charging overhead to products on the basis of materials cost. For the year 2017, materials cost of $500,000 were budgeted. Jim Brigham, owner-manager of Luxury Furniture, recently directed his accountant, Bob Borke, to implement the activity-based costing system that he has repeatedly proposed. At Jim Brigham’s request, Bob and the production foreman identify the following cost drivers and their usage for the previously budgeted overhead cost pools.
Overhead Cost Pools
Activity Cost Drivers
Expected
Use of
Cost Drivers
Purchasing
Number of orders
500
Handling materials
Number of moves
5,000
Production (cutting, milling, finishing)
Direct labor hours
65,000
Setting up machines
Number of setups
1,000
Inspecting
Number of inspections
4,000
Inventory control (raw materials and finished goods)
Number of components
40,000
Utilities
Square feet occupied
50,000
Debbie Steiner, sales manager, has received an order for 12 luxury armoires from Thom’s Interior Design. At Debbie’s request, Bob prepares cost estimates for producing 12 armoires so Debbie can submit a contract price per armoire to Thom’s. He accumulates the following data for the production of 12 armoires.
Direct materials
$5,200
Direct labor
$3,500
Direct labor hours
200
Number of purchase orders
3
Number of material moves
32
Number of machine setups
4
Number of inspections
20
Number of components
640
Number of square feet occupied 320
Instructions:
(a) Compute the predetermined overhead rate using traditional costing with materials cost as the basis.
(b) What is the manufacturing cost per armoire under traditional costing?
(c) What is the manufacturing cost per armoire 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?
Answers: 2
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