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P4-3A Thakin Stairs Co. designs

Price: $2.50

P4-3A Thakin 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 2014 are as follows.

For the last 4 years, Thakin Stairs Co. has been charging overhead to products on the
basis of machine hours. For the year 2014, 100,000 machine hours are budgeted.
Jeremy Nolan, owner-manager of Thakin 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.

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.

(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?

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