Question: 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 Brighamâ€TMs request, Bob and the production foreman identify the following cost drivers and their usage for the previously budgeted overhead cost pools.
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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 Thomâ€TMs Interior Design. At Debbieâ€TMs request, Bob prepares cost estimates for producing 12 armoires so Debbie can submit a contract price per armoire to Thomâ€TMs. He accumulates the following data for the production of 12 armoires.
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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: Cost/ armoire (traditional) $1,201.67
Cost/ armoire (ABC) $1,020.83
(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?