College Supply Company (CSC) makes three types of drinking glasses: short, medium, and tall. It presently applies overhead using a predetermined rate based on direct labor-hours. A group of company employees recommended that CSC switch to activity-based costing and identified the following activities, cost drivers, estimated costs, and estimated cost driver units for year 5 for each activity center. Activity Recommended Estimated Estimated Cost
Cost Driver Cost Driver Units
Setting up production Number of production runs 36,000 100 runs
Processing orders Number of orders 60,000 200 orders
Handling materials Pounds of materials 24,000 8,000 pounds
Using machines Machine-hours 72,000 10,000 hours
Providing quality management Number of inspections 60,000 40 inspections
Packing and shipping Units shipped 48,000 20,000 units
$ 300,000
In addition, management estimated 2,000 direct labor-hours for year 5.
Assume that the following cost driver volumes occurred in February year 5:
Short Medium Tall
Number of units produced 1,000 500 400
Direct materials costs $ 6,000 3,750 3,000
Direct labor-hours 100 120 110
Number of orders 8 8 4
Number of production runs 2 4 8
Pounds of material 400 800 200
Machine-hours 500 300 300
Number of inspections 2 2 2
Units shipped 1,000 500 300
Direct labor costs were $30 per hour.
Required:
(a) Compute a predetermined overhead rate for year 5 for each cost driver recommended by the employees. Also compute a predetermined rate using direct labor-hours as the allocation base. (Round your answers to 2 decimal places.)
(b) Compute the production costs for each product for February using direct labor-hours as the allocation base and the predetermined rate computed in requirement ( a ). (Do not round intermediate calculations. Round answers to the nearest whole dollar.)
(c) Compute the production costs for each product for February using the cost drivers recommended by the employees and the predetermined rates computed in requirement ( a ).( Note: Do not assume that total overhead applied to products in February will be the same for activity-based costing as it was for the labor-hour-based allocation.)