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Skaros Stairs Co. of Moore 89600

Price: $2.50

Skaros Stairs Co. of Moore 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 2011 are as follows.

Purchasing   57,000
Handling materials   82,000
Production (cutting, milling, finishing)   210,000
Setting up machines   85,000
Inspecting   90,000
Inventory control (raw materials and finished goods)   126,000
Utilities   180,000
Total budgeted overhead costs   $830,000

For the last 4 years, Skaros Stairs Co. has been charging overhead to products on
the basis of machine hours. For the year 2011, 100,000 machine hours are budgeted.
Anthony Morse, owner-manager of Skaros Stairs Co., recently directed his accountant,
Neal Seagren, to implement the activity-based costing system that he has repeatedly
proposed. At Anthony Morse’s request, Neal and the production foreman identify the following
cost drivers and their usage for the previously budgeted overhead cost pools.

David Hannon, sales manager, has received an order for 280 stairways from Community
Builders, Inc., a large housing development contractor. At David’s request, Neal
prepares cost estimates for producing components for 280 stairways so David can submit
a contract price per stairway to Community Builders. He accumulates the following data
for the production of 280 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

(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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