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Kitchen Kabinets 114400

Price: $2.50

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
Handling materials   164,320
Production (cutting, milling, finishing)   500,000
Setting up machines   174,480
Inspecting   184,800
Inventory control (raw materials and finished goods)   252,000
Utilities   360,000
Total budgeted 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.

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   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
(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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