Acc349 Managerial Accounting: P4-3B Kitchen Kabinets Company designs and builds upscale

Acc349 Managerial Accounting

Kitchen Kabinets Company designs and builds upscale kitchen cabinets for luxury homes. Many of the kitchen cabinet and counter arrangements are custom made, but occasionally the company does mass production on order. Its budgeted manufacturing overhead costs for the year 2006 are as follows. Overhead Cost Pools Amount
Purchasing 114,400.00
Handling materials 164,320.00
Production (cutting, milling, finishing) 500,000.00
Setting up machines 174,480.00
Inspecting 184,800.00
Inventory control (raw materials and
finished goods) 252,000.00
Utilities 360,000.00
Total budget overhead costs $1,750,000

For the last 3 years, Kitchen Kabinets Company has been charging overhead to products on the basis of machine hours. For the year 2006, 100,000 machine hours are budgeted. Ben Chen, the owner-manager, recently directed his accountant, John Kandy, to implement the activity-based costing system he has repeatedly proposed. At Ben’s request, John and the production foreman identify the following cost drivers and their usage for the previously budgeted overhead cost pools.
Activity Cost Pools Activity Cost Drivers Expected Use of Cost Drivers
Purchasing Number of orders 650
Handling materials Numbers of moves 8,000
Production (cutting, milling, finishing) Direct labor hours 100,000
Setting up machines Number of setups 1,200
Inspecting Number of inspections 6,000
Inventory control (raw materials and
finished goods) Number of components 36,000
Utilities Square feet occupied 90,000

Sara Sosa, sales manager, has received an order for 50 kitchen cabinet arrangements from Bitty Builders, a housing development contractor. At Sara’s request, John prepares cost estimates for producing components for 50 cabinet arrangements so Sara can submit a contract price per kitchen arrangement to Bitty Builders. He accumulates the following data for the production of 50 kitchen cabinet arrangements.
Direct materials 180,000
Direct labor 200,000
Machine hours 15,000
Direct labor hours 12,000
Number of purchase orders 50
Number of material moves 800
Number of machine setups 100
Number of inspections 450
Number of components (cabinets and accessories) 3,000
Number of square feet occupied 8,000

(a) Compute the predetermined overhead rate using traditional costing with machine hours as the basis. (Round to the nearest cent.)
(b) What is the manufacturing cost per complete kitchen arrangement under traditional costing?
(c) What is the manufacturing cost per kitchen arrangement under the proposed activity-based costing? (Prepare all of the necessary schedules.)
(d) Which of the two costing systems is preferable in pricing decisions and why?
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