Question

Stellar Stairs Co. designs and builds factory-made premium wooden stairs for homes. The manufactured stair components (spindles, risers, hangers, hand rails) permit installation of stairs of varying lengths and widths. All are made of white oak wood. The company's budgeted manufacturing overhead costs for 2016 are as follows: Overhead Cost Pools Purchasing Handling materials Production (cutting, milling, finishing) Setting up machines Inspecting Inventory control (raw materials and finished goods) Utilities Total budget overhead costs Amount $69,000 82,000 210,000 95,000 90,000 126,000 180,000 $852,000 For the last four years, Stellar Stairs Co. has been charging overhead to products on the basis of machine hours. For 2016, it has budgeted 100,000 machine hours. Heather Fujar, owner-manager of Stellar Stairs Co., recently directed her accountant, Kiko Nishikawa, to implement the activity-based costing system that she has repeatedly proposed. At Heather Fujar's request, Kiko and the production foreperson identify the following cost drivers and their usage for the previously budgeted overhead cost pools. Cost Drivers Number of orders Number of moves Expected Use of Cost Drivers 600 8,080 Activity Cost Pools Purchasing Handling materials Production (cutting, milling, finishing) Setting up machines Inspecting Inventory control (raw materials and finished goods) Utilities Direct labour hours Number of set-ups Number of inspections 104,440 1,530 6,340 Number of components Square metres occupied 171,620 9,850
Please show your calculations!

Answer 1

Predetermined overhead rate = Estimated overhead cost / Estimated machine hours

= 852,000 / 100,000

1. Predetermined overhead rate = 8.52 $ per machine hour

2. Manufacturing cost per unit under traditional costing = 1,211.21 $

3. Manufacturing cost per unit under activity based costing = 998.45 $

Note: Activity rates are rounded to 2 decimals.

4. Activity based costing is preferable in pricing decisions.

2. Computation of manufacturing cost under traditional costing Particulars Direct materials Direct labour Overheads Total manufacturing cost Number of units Manufacturing cost per unit Amount 103,600 A 112,000 B 123,540 14,500*8.52 C 339,140 A+B+C=D 280 E 1,211.21 D/E 3. Computation of manufacturing cost under activity-based costing Particulars Cost A Purchasing Handling materials Production Setting up machines Inspecting Inventory control Utilities 69,000 82,000 210,000 95,000 90,000 126,000 180,000 Volume B 600 8,080 104,440 1,530 6,340 171,620 9,850 Rate A/B 115.00 10.15 2.01 62.09 14.20 0.73 18.27 Amount 103,600 112,000 Particulars Direct materials Direct labour Overheads Purchasing Handling materials Production Setting up machines Inspecting Inventory control Utilities Total manufacturing cost Number of units Manufacturing cost per unit 6,900 115*60 8,120 10.15* 800 10,050 2.01*5,000 6,209 62.09*100 6,390 14.20*450 11,680 0.73*16,000 14,616 18.27*800 279,565 280 A B A/B 998.45