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Luxury Furniture 45000

Price: $2.50

Luxury Furniture designs and builds factory-made, premium, wood armoires for
homes. All are of white oak. Its budgeted manufacturing overhead costs for the year 2014
are as follows.

Purchasing   45,000
Handling materials   50,000
Production (cutting, milling, finishing)   130,000
Setting up machines   85,000
Inspecting   60,000
Inventory control (raw materials and finished goods)   80,000
Utilities   100,000
Total budgeted overhead costs   $550,000

For the last 4 years, Luxury Furniture has been charging overhead to products on the
basis of materials cost. For the year 2014, materials cost of $500,000 were budgeted.
Jim Brigham, owner-manager of Luxury Furniture, recently directed his accountant,
Bob Borke, to implement the activity-based costing system that he has repeatedly proposed.
At Jim Brigham’s request, Bob 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  500
Handling materials  Number of moves  5,000
Production (cutting, milling, finishing)  Direct labor hours  65,000
Setting up machines  Number of setups  1,000
Inspecting  Number of inspections  4,000
Inventory control (raw materials 
 and finished goods)  Number of components  40,000
Utilities  Square feet occupied  50,000

Debbie Steiner, sales manager, has received an order for 12 luxury armoires from
Thom’s Interior Design. At Debbie’s request, Bob prepares cost estimates for producing 12
armoires so Debbie can submit a contract price per armoire to Thom’s. He accumulates
the following data for the production of 12 armoires.

Direct materials   5,200
Direct labor   3,500
Direct labor hours   200
Number of purchase orders   3
Number of material moves   32
Number of machine setups   4
Number of inspections   20
Number of components   640
Number of square feet occupied   320

(a) Compute the predetermined overhead rate using traditional costing with materials
cost as the basis.
(b) What is the manufacturing cost per armoire under traditional costing?
(c) What is the manufacturing cost per armoire 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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