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-volum (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-galon cylinder that holds i0 pounds of multi-purpose dry chemical at 390 PSI. Both products require 1.5 hours of direct labor for completion. Therefore, tekal 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 $25.50 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 Estimated Use of Cost Drivers Activity Cost Pools Home Receiving Cost Drivers Pounds Machine hours Number of parts Number of tests Gallons Pounds Forming Assembling Testing Painting Packing and shipping Estimated Overhead $80,400 150,500 412,300 51.000 52.580 837500 215,000 27,000 165,000 35,000 217,000 25,500 5,258 335,000 Commercial 120,000 8.000 52,000 10,000 1,578 120.000 15,500 3,680 215,000 $1,584,20 . 12.50) Under traditional product costing, compute the total unit cost of each product. (Hound answers to 2 decimal places Home Model Commercial Model Total unit cost

Answer 1

Calculations of unit cost under traditional method. Direct Material Direct Labor Overhead cost ($ 16.45 x 1.5 hr) Total Unit Cost Home Model 18.50 19.00 24.68 62.18 Commercial Model S 26.50 Given $ 19.00 Given $ 24.68 Predetermined overhead rate x direct labor hour used $ 70.18 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 Estimated Overhead Activity based overhead rate Activity cost pool Receiving Forming Assembling Testing Painting Packaging & Shipping osas 80,400 150,500 412,300 51,000 52,580 837,500 1,584,280 335000 Pounds 35000 Machine hour 217000 Parts 25500 Tests 5258 Gallons 335000 Pounds 0.24 Per Pound 4.30 Per Machine Hour 1.90 Per Parts 2.00 Per Test 10.00 Per Gallon 2.50 Per Pound S $ 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 215000 $ 0.24 27000 S 4.30 165000 $ 1.90 15500 $ 2.00 3680 $ 10.00 215000 $ 2.50 S Cost Assigned $ 51,600 S 116,100 $ 313,500 S 31,000 $ 36,800 5 37,500 Commercial Model Expected Cost Activity based driver overhead rate 120000 $ 0.24 8000 S 4.30 52000 $ 1.90 10000 $ 2.00 1578 $ 10.00 120000 $ 2.50 Cost Assigned $ 28,800 $ 34,400 $ 98,800 $ 20,000 $ 15,780 $ 300,000 S $ Total Cost Assigned Units Produced Overhead Cost Per Unit (a) D (6) (a)/(b) 1,086,500 54000 20.12 497,780 10200 48.80 s $ Total cost per unit under ABC method: Direct Material Direct Labor Overhead cost Total Unit Cost $ $ $ $ Home Model 18.50 19.00 20.12 57.62 Commercial Model $ 26.50 $ 19.00 $ 48.80 $ 94.30 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.