Maryville Manufacturing designs and builds custom mudroom storage benches.All of the mudroom storage benches are constructed with rustic hickory.Its budgeted manufacturing costs for the 2018 year 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 5 years, Maryville Manufacturing has been charging overhead to products on the basis of materials cost.For the year 2018, materials cost of $500,000 were budgeted.
Jim Johnson, owner-manager of Maryville Manufacturing, recently directed his accountant, Ledger Kaufman, to implement the activity-based costing system that he has repeatedly proposed.At Jim’s request, Ledger and the production foreman identify the following cost drivers and their usage for the previously budgeted overhead cost pools.
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
Doug Russell, sales manager, has received an order for 12 custom mudroom storage benches from Homes by Kathy.At Doug’s request, Ledger prepares costs estimates for producing 12 mudroom storage benches so Doug can submit a contract price per mudroom storage bench to Homes by Kathy.He accumulates the following data for the production of 12 mudroom storage benches.
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
Required:
Compute the predetermined overhead rate using traditional costing with direct materials cost as the allocation base.
Compute the total cost of manufacturing one mudroom storage bench using direct materials cost as the allocation base for manufacturing overhead.
Compute the predetermined overhead rate using traditional costing with direct labor hours as the allocation base.
Compute the total cost of manufacturing one mudroom storage bench using direct labor hours as the allocation for manufacturing overhead.
Compute the predetermined overhead rate per cost driver for each of the overhead cost pools using the proposed activity-based costing system.
Compute the total cost of manufacturing one mudroom storage bench using the proposed activity-based costing system.
Which allocation base is preferable under traditional costing and why?
Which costing system (traditional or activity-based) is preferable in pricing decisions and why?
Prepare a formal memo addressed to the owner of the company that includes a recommendation related to the adoption of activity-based costing.
Sample Solution
