(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. (2) Compute a predetermined rate for year 2 using direct labor-hours as the allocation base. 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). 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
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
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 | $ | 46,000 | 200 | orders | ||
| Setting up production | Number of production runs | 144,000 | 80 | runs | |||
| Handling materials | Pounds of materials used | 264,000 | 120,000 | pounds | |||
| Machine |
Machine-hours | 240,000 | 12,000 | hours | |||
| Performing quality control | Number of inspections | 52,000 | 40 | inspections | |||
| Packing | Number of units | 144,000 | 480,000 | units | |||
| Total estimated cost | $ | 890,000 | |||||
In addition, management estimated 7,500 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 | 56,000 | 23,000 | 11,000 | ||||||
| Direct materials costs | $ | 35,000 | $ | 23,000 | $ | 18,000 | |||
| Direct labor-hours | 480 | 450 | 590 | ||||||
| Number of orders | 11 | 8 | 6 | ||||||
| Number of production runs | 3 | 2 | 5 | ||||||
| Pounds of material | 12,000 | 6,000 | 3,300 | ||||||
| Machine-hours | 570 | 140 | 70 | ||||||
| Number of inspections | 3 | 2 | 3 | ||||||
| Units shipped | 56,000 | 23,000 | 11,000 | ||||||
Actual labor costs were $15 per hour.
Required:
a.
(1) Compute a predetermined
(2) Compute a predetermined rate for year 2 using direct labor-hours as the allocation base.
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).
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.)
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