Chapter 4, Problem 4.3AP

Shaker Stairs Co. designs and builds factory-made premium wooden stairways for homes. The manufactured stairway components (spindles, risers, hangers, hand rails) permit installation of stairways of varying lengths and widths. All are of white oak wood. Budgeted manufacturing overhead costs for the year 2017 are as follows.

Overhead Cost Pools	Amount
Purchasing	$ 75,000
Handling materials	82,000
Production (cutting, milling, finishing)	210,000
Setting up machines	105,000
Inspecting	90,000
Inventory control (raw materials and finished goods)	126,000
Utilities	180,000
Total budgeted overhead costs	$868,000

For the last 4 years, Shaker Stairs Co. has been charging overhead to products on the basis of machine hours. For the year 2017, 100,000 machine hours are budgeted.

Jeremy Nolan, owner-manager of Shaker Stairs Co., recently directed his accountant. Bill Seagren. to implement the activity-based costing system that he has repeatedly proposed. At Jeremy Nolan's request, Bill 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 (raw materials and finished goods)	Number of components	168,000
Utilities	Square feet occupied	90,000

Steve Hannon, sales manager, has received an order for 250 stairways from Community Builders. Inc., a large housing development contractor. At Steve's request, Bill prepares cost estimates for producing components for 250 stairways so Steve can submit a contract price per stairway to Community Builders. He accumulates the following data for the production of 250 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	16,000
Number of square feet occupied	8,000

Instructions

(a) Compute the predetermined overhead rate using traditional costing with machine hours as the basis.

(b) What is the manufacturing cost per stairway under traditional costing? (Round to the nearest cent.)

(c) What is the manufacturing cost per stairway under the proposed activity-based costing? (Round to the nearest cent. Prepare all of the necessary schedules.)

(d) - Which of the two costing systems is preferable in pricing decisions and why?