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 al l ume (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 Co l on Therefore, total annual direct labor hours are 96,300 or (1.5 hours x (54,000 + 10,200)). Estimated annual manufacturing overhead is $1,569.238. Thus, the predetermined overhead rate is $16.30 or ($1,569,238 +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. The company's managers identified six activity cost pools and related cost drivers and accumulated overhead by cost pool as follows. Estimated Use of Drivers by Product Activity Cost Pools Cost Drivers Estimated Overhead Commercial 120,000 Receiving Pounds Estimated Use of Cost Drivers Home 335,000 215,000 35,000 27,000 217.000 165,000 $83.750 155,050 Forming Machine hours 8,000 Assembling Number of parts 403,620 52,000 Testing Number of tests 44,880 25,500 15,500 10,000 Painting Gallons 57,838 824,100 5,258 3,680 335,000 215,000 1.578 120,000 Packing and shipping Pounds $1,569.238

Answer 1

Calculations of unit cost under traditional method. Direct Material Direct Labor Overhead cost ($ 16.30 x 1.5 hr) Total Unit Cost Home Model 18.50 19.00 24.45 61.95 Commercial Model $ 26.50 Given $ 19.00 Given $ 24.45 Predetermined overhead rate * direct labor hour used $ 69.95 Schedule Showing computation of activity based overhead rates (per cost driver). Activity based overhead rate = Estimated Overhead / Expected use of cost driver Expected use of cost driver Activity based overhead rate Activity cost pool Estimated Overhead $ Receiving Forming Assembling Testing Painting Packaging & Shipping 83,750 155,050 403,620 44,880 57,838 824,100 1,569,238 335000 Pounds 35000 Machine hour 217000 Parts 25500 Tests 5258 Gallons 335000 Pounds 0.25 Per Pound 4.43 Per Machine Hour 1.86 Per Parts 1.76 Per Test 11.00 Per Gallon 2.46 Per Pound $ $

Schedule showing assigning of each product based on the use of cost driver Cost Assigned = Expected Cost driver x Activity based overhead rate Activity cost pool Receiving Forming Assembling Testing Painting Packaging & Shipping Home Model Activity based Expected Cost driver overhead rate Cost Assigned 215000 $ 0.25 $ 53,750 27000 $ 4.43 $ 119,610 165000 $ 1.86 $ 306,900 15500 $ 1.76 $ 27,280 3680 $ 11.00 $ 40,480 215000 $ 2.46 $ 528,900 Commercial Model Expected Cost Activity based driver overhead rate 120000 $ 0.25 8000 $ 4.43 52000 $ 1.86 10000 $ 1.76 1578 $ 11.00 120000 $ 2.46 Cost Assigned $ 30,000 $ 35,440 $ 96,720 $ 17,600 $ 17,358 $ 295,200 $ $ Total Cost Assigned Units Produced Overhead Cost Per Unit (a) (b) (a)/(b) 1,076,920 54000 19.94 492,318 10200 $ 48.27 Total cost per unit under ABC method: Direct Material Direct Labor Overhead cost Total Unit Cost $ $ Home Model 18.50 19.00 19.94 57.44 Commercial Model $ 26.50 $ 19.00 $ 48.27 $ 93.77 Classify each activity as value added or non value added activity Receiving Forming Assembling Testing Painting Packaging & Shipping Non Value Added Value Added Value Added Non Value Added Value Added Value Added Non Value added activities are those activities which does not add any value to the product. Receiving & Testing both does not add any value to the product while other activities add value to the product.

Calculations of unit cost under traditional method. Direct Material Direct Labor Overhead cost ($ 16.30 x 1.5 hr) Total Unit

Cost Home Model 18.50 19.00 24.45 61.95 Commercial Model $ 26.50 Given $ 19.00 Given $ 24.45 Predetermined overhead rate * direct labor hour used $ 69.95 Schedule Showing computation of activity based overhead rates (per cost driver). Activity based overhead rate = Estimated Overhead / Expected use of cost driver Expected use of cost driver Activity based overhead rate Activity cost pool Estimated Overhead $ Receiving Forming Assembling Testing Painting Packaging & Shipping 83,750 155,050 403,620 44,880 57,838 824,100 1,569,238 335000 Pounds 35000 Machine hour 217000 Parts 25500 Tests 5258 Gallons 335000 Pounds 0.25 Per Pound 4.43 Per Machine Hour 1.86 Per Parts 1.76 Per Test 11.00 Per Gallon 2.46 Per Pound $ $

Schedule showing assigning of each product based on the use of cost driver Cost Assigned = Expected Cost driver x Activity based overhead rate Activity cost pool Receiving Forming Assembling Testing Painting Packaging & Shipping Home Model Activity based Expected Cost driver overhead rate | Cost Assigned 215000 $ 0.26 $ 55,900 27000 $ 4.40 $ 118,800 165000 $ 1.88 $ 310,200 15500 $ 1.76 $ 27,280 3680 $ 11.60 $ 42,688 215000 $ 2.46 $ 528,900 Commercial Model Expected Cost Activity based driver overhead rate Cost Assigned 120000 $ 0.26 $ 31,200 8000 $ 4.40 $ 35,200 52000 $ 1.88 $ 97,760 10000 $ 1.76 $ 17,600 1578 $ 11.60 $ 18,305 120000 $ 2.46 $ 295,200 $ Total Cost Assigned Units Produced Overhead Cost Per Unit 1,083,768 54000 20.07 495,265 10200 (b) (a)/(b) $ 48.56 Total cost per unit under ABC method: Direct Material Direct Labor Overhead cost Total Unit Cost Home Model 18.50 19.00 20.07 57.57 Commercial Model $ 26.50 $ 19.00 $ 48.56 $ 94.06 Classify each activity as value added or non value added activity Receiving Forming Assembling Testing Painting Packaging & Shipping Non Value Added Value Added Value Added Non Value Added Value Added Value Added Non Value added activities are those activities which does not add any value to the product. Receiving & Testing both does not add any value to the product while other activities add value to the product.