Question

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 82,000

Production (cutting, milling, finishing) 210,000

Setting up machines 105,000

Inspecting 90,000

Inventory control (raw materials and finished goods) 126,000

Utilities 180,000

Total budgeted overhead costs $868,000

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 $103,600

Direct labor $112,000

Machine hours 14,500

Direct labor hours 5,000

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

Instructions: Please fill out tables below

(c) What is the manufacturing cost per stairway under the proposed activity-based costing? (Round to the nearest cent. Prepare all of the necessary schedules.)

activity cost pool	total estimated overhead	total est'd drivers	total est'd drivers	activity based overhead	activity based overhead
		Number	Driver	Rate	Per
Purchasing
Handling materials
Production
Setting up machines
inspecting
inventory control
utilities
total

ASSIGNMENT OF OVERHEAD TO ORDER OF 250 STAIRWAYS

activity cost pool	expected used of driver	expected used of driver	activity based overhead rate	cost assigned
	Number	Driver
Purchasing
Handling materials
Production
Setting up machines
Inspecting
Inventory Control
Utilities
Total overhead assigned

Answer 1

ESTIMATED ACTIVITY BASED OVERHEAD FOR 250 UNITS:

Activity Cost Pool	Total Estimated Overhead	Cost Driver	Total Estimated Number of Drivers	Activity Based Overhead Rate	Activity Based Cost for 250 unit
Purchasing	75,000	Number of Orders	600	125	31,250
Handling materials	82,000	Number of Moves	8,000	10	2,563
Production	2,10,000	Direct Labour Hours	1,00,000	2	525
Setting up machines	1,05,000	Number of Setups	1,250	84	21,000
Inspecting	90,000	Number of Inspection	6,000	15	3,750
Inventory control	1,26,000	Number of components	1,68,000	1	188
Utilities	1,80,000	Square feet occupied	90,000	2	500
Total	8,68,000				59,775

ACTUAL OVERHEADS:

Cost Driver	Total Estimated Number of Drivers	Activity Based Overhead Rate	Activity Based Cost for 250 unit
Number of Orders	60	125	7,500
Number of Moves	800	10	8,000
Direct Labour Hours	5,000	2	10,000
Number of Setups	100	84	8,400
Number of Inspection	450	15	6,750
Number of components	16,000	1	16,000
Square feet occupied	8,000	2	16,000
Actual Over heads			72,650