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 $73,800
Handling materials 82,160
Production (cutting, milling, finishing) 221,000
Setting up machines 96,250
Inspecting 96,000
Inventory control (raw materials and finished goods) 131,040
Utilities 450,000
Total budgeted overhead costs $1,150,250
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 Nolanâs 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 Steveâs 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 $104,200 Direct labor $112,200 Machine hours 15,300 Direct labor hours 5,300 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
a) Compute the predetermined overhead rate using traditional costing with machine hours as the basis.
(b) What is the manufacturing cost per stairway under traditional costing?
(c) What is the manufacturing cost per stairway 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?
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 | $73,800 | |
| Handling materials | 82,160 | |
| Production (cutting, milling, finishing) | 221,000 | |
| Setting up machines | 96,250 | |
| Inspecting | 96,000 | |
| Inventory control (raw materials and finished goods) | 131,040 | |
| Utilities | 450,000 | |
| Total budgeted overhead costs | $1,150,250 |
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 Nolanâs 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 | ||
| 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 Steveâs 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 | $104,200 | |
| Direct labor | $112,200 | |
| Machine hours | 15,300 | |
| Direct labor hours | 5,300 | |
| 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 |
a) Compute the predetermined overhead rate using traditional costing with machine hours as the basis.
(b) What is the manufacturing cost per stairway under traditional costing?
(c) What is the manufacturing cost per stairway 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?
