Reference no: EM132515140

Maryville Manufacturing

Maryville Manufacturing designs and builds custom mudroom storage benches. All of the mudroom storage benches are constructed with rustic hickory. Its budgeted manufacturing costs for the 2018 year are as follows.

Overhead Cost Pools Amount

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 5 years, Maryville Manufacturing has been charging overhead to products on the basis of materials cost. For the year 2018, materials cost of $500,000 were budgeted.

• Jim Johnson, owner-manager of Maryville Manufacturing, recently directed his accountant, Ledger Kaufman, to implement the activity-based costing system that he has repeatedly proposed. At Jim's request, Ledger and the production foreman identify the following cost drivers and their usage for the previously budgeted overhead cost pools.

Overhead Cost Pools Activity 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

• Doug Russell, sales manager, has received an order for 12 custom mudroom storage benches from Homes by Kathy. At Doug's request, Ledger prepares costs estimates for producing 12 mudroom storage benches so Doug can submit a contract price per mudroom storage bench to Homes by Kathy. He accumulates the following data for the production of 12 mudroom storage benches.

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

Required:

Question 1. Compute the predetermined overhead rate using traditional costing with direct materials cost as the allocation base.

Question 2. Compute the total cost of manufacturing one mudroom storage bench using direct materials cost as the allocation base for manufacturing overhead.

Question 3. Compute the predetermined overhead rate using traditional costing with direct labor hours as the allocation base.

Question 4. Compute the total cost of manufacturing one mudroom storage bench using direct labor hours as the allocation for manufacturing overhead.

Question 5. Compute the predetermined overhead rate per cost driver for each of the overhead cost pools using the proposed activity-based costing system.

Question 6. Compute the total cost of manufacturing one mudroom storage bench using the proposed activity-based costing system.

Question 7. Which allocation base is preferable under traditional costing and why?

Question 8. Which costing system (traditional or activity-based) is preferable in pricing decisions and why?

Question 9. What would a formal memo addressed to the owner of the company that includes a recommendation related to the adoption of activity-based costing.