Question

Maryville Manufacturing designs and builds custom mudroomstorage benches. All of the mudroom storage benches are constructedwith rustic hickory. Its budgeted manufacturing costs for the 2018year 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 chargingoverhead to products on the basis of materials cost. For the year2018, materials cost of $500,000 were budgeted.

Jim Johnson, owner-manager of Maryville Manufacturing, recentlydirected his accountant, Ledger Kaufman, to implement theactivity-based costing system that he has repeatedly proposed. AtJim’s request, Ledger and the production foreman identify thefollowing cost drivers and their usage for the previously budgetedoverhead 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 custommudroom storage benches from Homes by Kathy. At Doug’s request,Ledger prepares costs estimates for producing 12 mudroom storagebenches so Doug can submit a contract price per mudroom storagebench to Homes by Kathy. He accumulates the following data for theproduction 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:

Compute the predetermined overhead rate using traditionalcosting with direct materials cost as the allocation base.

Compute the total cost of manufacturing one mudroom storagebench using direct materials cost as the allocation base formanufacturing overhead.

Compute the predetermined overhead rate using traditionalcosting with direct labor hours as the allocation base.

Compute the total cost of manufacturing one mudroom storagebench using direct labor hours as the allocation for manufacturingoverhead.

Compute the predetermined overhead rate per cost driver for eachof the overhead cost pools using the proposed activity-basedcosting system.

Compute the total cost of manufacturing one mudroom storagebench using the proposed activity-based costing system.

Which allocation base is preferable under traditional costingand why?

Which costing system (traditional or activity-based) ispreferable in pricing decisions and why?