Question

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 $75,000 Handling materials 82,560 Production (cutting, milling, finishing) 219,000 Setting up machines 102,500 Inspecting 120,000 Inventory control (raw materials and finished goods) 137,760 Utilities 360,000 Total budgeted overhead costs $1,096,820 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 $104,100 Direct labor $112,300 Machine hours 14,600 Direct labor hours 5,600 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 Caluclate total overhead assigned under ABC.

Answer 1

Solution:

Determination of activity rate for each activity & allocation of overhead to Job
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate	Stairway Job
					Usage	Allocated Costs
Purchasing	$75,000.00	Nos of orders	600	$125.00	60	$7,500.00
Handling material	$82,560.00	Nos of moves	8000	$10.32	800	$8,256.00
Production	$219,000.00	Direct labor hours	100000	$2.19	5600	$12,264.00
Setting up machines	$102,500.00	Nos of setups	1250	$82.00	100	$8,200.00
Inspecting	$120,000.00	Nos of inspections	6000	$20.00	450	$9,000.00
Inventory Control	$137,760.00	Nos of component	168000	$0.82	16000	$13,120.00
Utilities	$360,000.00	Square feet occupied	90000	$4.00	8000	$32,000.00
Total	$1,096,820.00					$90,340.00