Question

Combat Fire, Inc. manufactures steel cylinders and nozzles for two models of fire extinguishers: (1) a home fire extinguisher and (2) a commercial fire extinguisher. The home model is a high-volume (54,000 units), half-gallon cylinder that holds 2 1/2 pounds of multi-purpose dry chemical at 480 PSI. The commercial model is a low-volume (10,200 units), two-gallon cylinder that holds 10 pounds of multi-purpose dry chemical at 390 PSI. Both products require 1.5 hours of direct labor for completion. Therefore, total annual direct labor hours are 96,300 or [1.5 hours × (54,000 + 10,200)]. Expected annual manufacturing overhead is $1,580,700. Thus, the predetermined overhead rate is $16.41 or ($1,580,700 ÷ 96,300) per direct labor hour. The direct materials cost per unit is $18.50 for the home model and $26.50 for the commercial model. The direct labor cost is $19 per unit for both the home and the commercial models.

								Expected Use of Drivers by Product
Activity Cost Pools		Cost Drivers		Estimated Overhead		Expected Use of Cost Drivers		Home		Commercial
Receiving		Pounds		$81,600		335,000		215,000		120,000
Forming		Machine hours		151,000		35,000		27,000		8,000
Assembling		Number of parts		415,000		217,000		165,000		52,000
Testing		Number of tests		52,000		25,500		15,500		10,000
Painting		Gallons		53,100		5,258		3,680		1,578
Packing and shipping		Pounds		828,000		335,000		215,000		120,000
				$1,580,700

A) Under tradational product costing, compute the total unit cost of each product. Prepare a simple comparitive schedule of the individual costs by product. B) Under ABC, prepare a schedule showing the computations of the activity-based overhead rates (per cost driver) C) Prepare a schedule assiging each activity's overhead cost pool to each product based on the use of cost drivers. (Include a computation of overhead cost per unit, roudning to the nearest cent.) D) Compute the total cost per unit for each product under ABC. E) Classify each of the activities as a value-added activity or a non-value-added activity.

Answer 1

Solution a:

Computation of unit cost of each product - Traditional costing - Combat fire Inc.
Particulars	Home Fire Extinguisher	Commercial Fire Extenguisher
Direct material	$18.50	$26.50
Direct labor	$19.00	$19.00
Manufacturing overhead	$24.62	$24.62
Unit Product Cost	$62.12	$70.12

Solution b:

Determination of activity rate for each activity
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate
					Receiving	$81,600.00	Pounds	335000	$0.24
Forming	$151,000.00	Machine hours	35000	$4.31
Assembling	$415,000.00	Nos of parts	217000	$1.91
Testing	$52,000.00	Nos of tests	25500	$2.04
Painting	$53,100.00	Gallon	5258	$10.10
Packing and shipping	$828,000.00	Pounds	335000	$2.47
Total	$1,580,700.00

Solution c:

Allocation of overhead and computation of overhead cost per unit
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate	Home		Commercial
					Usage	Allocated Costs	Usage	Allocated Costs
Receiving	$81,600.00	Pounds	335000	$0.24	215000	$52,370	120000	$29,230
Forming	$151,000.00	Machine hours	35000	$4.31	27000	$116,486	8000	$34,514
Assembling	$415,000.00	Nos of parts	217000	$1.91	165000	$315,553	52000	$99,447
Testing	$52,000.00	Nos of tests	25500	$2.04	15500	$31,608	10000	$20,392
Painting	$53,100.00	Gallon	5258	$10.10	3680	$37,164	1578	$15,936
Packing and shipping	$828,000.00	Pounds	335000	$2.47	215000	$531,403	120000	$296,597
Total	$1,580,700.00					$1,084,584		$496,116
Nos of units						54000		10200
Overhead cost per unit						$20.08		$48.64

Solution d:

Computation of unit cost of each product - Activity Based costing - Combat Fire Inc.
Particulars	Home Fire Extinguisher	Commercial Fire Extinguisher
Direct material	$18.50	$26.50
Direct labor	$19.00	$19.00
Manufacturing overhead	$20.08	$48.64
Unit Product Cost	$57.58	$94.14

Solution E:

Activity	Value Added / Non Value Added
Receiving	Non Value Added
Forming	Value Added
Assembling	Value Added
Testing	Non Value Added
Painting	Value Added
Packing and shipping	Value Added