Karen Supply, Inc. (KSI), manufactures three types of flatware: institutional, standard, and silver. It applies all indirect costs according to a predetermined rate based on direct labor-hours. A consultant recently suggested that the company switch to an activity-based costing system and prepared the following cost estimates for year 2 for the recommended cost drivers. Activity Recommended
Cost Driver Estimated
Cost Estimated Cost
Driver Activity
Processing orders Number of orders $ 44,000 200 orders
Setting up production Number of production runs 144,000 90 runs
Handling materials Pounds of materials used 280,000 140,000 pounds
Machine depreciation and maintenance Machine-hours 252,000 14,000 hours
Performing quality control Number of inspections 67,500 50 inspections
Packing Number of units 150,000 500,000 units
Total estimated cost $ 937,500

In addition, management estimated 7,900 direct labor-hours for year 2.

Assume that the following cost driver volumes occurred in January, year 2.

Institutional Standard Silver
Number of units produced 61,000 23,000 7,000
Direct materials costs $ 41,000 $ 23,000 $ 16,000
Direct labor-hours 400 420 640
Number of orders 14 8 7
Number of production runs 2 3 7
Pounds of material 14,000 6,000 3,100
Machine-hours 600 140 100
Number of inspections 3 3 2
Units shipped 61,000 23,000 7,000

Actual labor costs were $15 per hour.

Required:

a.

(1) Compute a predetermined overhead rate for year 2 for each cost driver using the estimated costs and estimated cost driver units prepared by the consultant.
(2) Compute a predetermined rate for year 2 using direct labor-hours as the allocation base.

b. Compute the production costs for each product for January using direct labor-hours as the allocation base and the predetermined rate computed in requirement a(2).

c. Compute the production costs for each product for January using the cost drivers recommended by the consultant and the predetermined rates computed in requirement a. (Note: Do not assume that total overhead applied to products in January will be the same for activity-based costing as it was for the labor-hour-based allocation.)