Kitchen Supply, Inc. - Overhead allocation on traditional and ABC basis

Kitchen Supply, Inc. (KSI), manufactures three types of flatware: institutional, standard, and silver. It applies all indirect costs according to a predetermined rate based on direct labor-hours. A consultant recently suggested that the company switch to an activity-based costing system and prepared the following cost estimates for year 2 for the recommended cost drivers.

Activity           Recommended Cost Driver    Estimated Cost           Estimated Cost Driver Activity

Processing orders        Number of orders                    $ 45,000                      200 orders

Setting up production Number of production runs    170,000                       100 runs

Handling materials      Pounds of materials used        364,000                       130,000 pounds Machine depreciation and

maintenance                Machine-hours                        209,000                       11,000 hours Performing

quality control             Number of inspections            47,600                         35 inspections

Packing                       Number of units                      147,000                       490,000 units

Total estimated cost                                                    $ 982,600

In addition, management estimated 7,300 direct labor-hours for year 2.

Assume that the following cost driver volumes occurred in January year 2:

                        Institutional                 Standard         Silver

Number of units produced                  58,000                         23,000             10,000

Direct materials costs                          $ 40,000                      $ 23,000          $ 16,000

Direct labor-hours                               410                              470                  570

Number of orders                                11                                8                      5

Number of production runs                3                                  2                      6

Pounds of material                              16,000                         5,000               3,300

Machine-hours                                    580                              150                  70

Number of inspections                        3                                  3                      3

Units shipped                                      58,000                         23,000             10,000

Actual labor costs were                       $15 per hour.

Required: (a) (1) Compute a predetermined overhead rate for year 2 for each cost driver using the estimated costs and estimated cost driver units prepared by the consultant. (Round your answers to 2 decimal places.)

(2) Compute a predetermined rate for year 2 using direct labor-hours as the allocation base. (Round your answer to 2 decimal places.)

(b) Compute the production costs for each product for January using direct labor-hours as the allocation base and the predetermined rate computed in requirement (a)(2). (Round "Indirect costs" to the nearest dollar.)

(c) Compute the production costs for each product for January using the cost drivers recommended by the consultant and the predetermined rates computed in requirement ( a ). (

Note: Do not assume that total overhead applied to products in January will be the same for activity-based costing as it was for the labor-hour-based allocation.)