Question

 Combat Fire, Ine, 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 chemi- cal 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 x (54,000+ 10,200)). Estimated annual manufacturing overhead is $1,584,280. Thus, the predetermined overhead rate is $16.45 or ($1,584,280 +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. 

Instructions

 a. Under traditional product costing, compute the total unit cost of each product. Prepare a simple comparative schedule of the individual costs by product (similar to Illustration 4.3).

 b. Under ABC, prepare a schedule showing the computations of the activity-based overhead rates (per cost driver).

 c. Prepare a schedule assigning each activity's overhead cost pool to each product based on the use of cost drivers. (Include a computation of overhead cost per unit, rounding 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.

 f. Comment on (1) the comparative overhead cost per unit for the two products under ABC, and (2) the comparative total costs per unit under traditional costing and ABC. 

Answer 1

			Home		Commercial
			Model		model
	total unit cost		62.18		70.18	answer
	working
	materials		18.50		26.50
	direct labor		19.00		19.00
	overhead (16.45*1.5)		24.68		24.68
a)	total unit cost		62.18		70.18
b)			Estimated	expected	activity based overhead
	Activity cost pool		overhead	drivers	rate
	Receiving		80,400	335,000	0.24	per pound
	Forming		150,500	35,000	4.3	per machine hour
	Assembling		412,300	217,000	1.9	per part
	Testing		51,000	25,500	2	per test
	Painting		52,580	5,258	10	per gallon
	packing & shipping		837,500	335,000	2.5	per pound
			1,584,280
c)			Home Model			Commercial model
	Activity cost pool		expected use	oh rate	cost assigned	expected use	oh rate	cost assigned
	Receiving		215,000	0.24	51600	120,000	0.24	28800
	Forming		27,000	4.3	116100	8000	4.3	34400
	Assembling		165,000	1.9	313500	52000	1.9	98800
	Testing		15,500	2	31000	10,000	2	20000
	Painting		3,680	10	36800	1,578	10	15780
	packing & shipping		215,000	2.5	537500	120,000	2.5	300000
	total costs assigned				1086500			497780
	units produced				54,000			10,200
	overhead cost per unit				20.12			48.80
				home	Commercial
d)	total cost per unit			57.62	94.30
e)	Activity
	Receiving			non value added
	Forming			value added
	Assembling			value added
	Testing			non value added
	Painting			value added
	packing & shipping			value added
f)	Under ABC system the overhead cost per unit is more realistic as it is based on activity pools
	whereas under traditional it is simply based on direct labor hours