Skaros Stairs Co. of Moore designs and builds factory-made premium wooden stairs for homes. The manufactured stair components (spindles, risers, hangers, hand rails) permit installation of stairs of varying lengths and widths. All are of white oak wood. Budgeted manufacturing overhead costs for the year 2011 are as follows.
Overhead Cost Pools Amount
Purchasing $ 57,000
Handling materials 82,000
Production (cutting, milling, finishing) 210,000
Setting up machines 85,000
Inspecting 90,000
Inventory control (raw materials and finished goods) 126,000
Utilities 180,000
Total budget overhead costs $830,000
For the last 4 years, Skaros Stairs Co. has been charging overhead to products on the basis of machine hours. For the year 2011, 100,000 machine hours are budgeted.
Anthony Morse, owner-manager of Skaros Stairs Co., recently directed his accountant, Neal Seagren, to implement the activity-based costing system that he has repeatedly proposed. At Anthony Morse's request, Neal 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 Number of components 168,000
(raw materials and finished goods)
Utilities Square feet occupied 90,000
David Hannon, sales manager, has received an order for 280 stairs from Community Builders, Inc., a large housing development contractor. At David's request, Neal prepares cost estimates for producing components for 280 stairs so David can submit a contract price per stair to Community Builders. He accumulates the following data for the production of 280 stairways.
Direct materials $103,600
Direct labor $112,000
Machine hours 14,500
Direct labor hours 5,000
Number of purchase orders 60
Number of material moves 800
Number of machine setups 100
Number of inspections 450
Number of components 1 6,000
Number of square feet occupied 8,000
Requirement:
- Compute the predetermined overhead rate using traditional costing with machine hours as the basis.
- What is the manufacturing cost per stairway under traditional costing?
- What is the manufacturing cost per stairway under the proposed activity-based costing?
- Which of the two costing systems is preferable in pricing decisions and why?
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