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)]. Estimated annual manufacturing overhead is $1,574,800. Thus, the predetermined overhead rate is $16.35 or ($1,574,800 = 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 Estimated Use of Cost Drivers Activity Cost Pools Cost Drivers Estimated Overhead Home Commercial Receiving Pounds $87,100 335,000 215,000 120,000 Forming Machine hours 151.900 35,000 27,000 8,000 Assembling Number of parts 405,790 52.000 Testing Number of tests 49,980 217,000 165,000 25,500 15,500 5,258 3.680 10,000 Painting Gallons 52,580 1,578 Packing and shipping Pounds 335,000 215,000 120,000 827,450 $1,574,800 (a) Under traditional product costing, compute the total unit cost of each product. (Round answers to 2 decimal places, e.g. 12.50.) Home Model Commercial Model Total unit cost $

Answer 1

Solution a:

Computation of unit cost of each product - Traditional costing - Combat Fire Inc.
Particulars	Home Model	Commercial Model
Direct material	$18.50	$26.50
Direct labor	$19.00	$19.00
Manufacturing overhead ($16.35*1.5)	$24.53	$24.53
Total Unit Cost	$62.03	$70.03

Solution b:

Determination of activity rate for each activity
Activity cost pool	Estimated Overhead Cost	Expected use of cost drivers		Activity Rate
					Receiving	$87,100.00	335000	Pounds	$0.26
Forming	$1,51,900.00	35000	Machine hours	$4.34
Assembling	$4,05,790.00	217000	parts	$1.87
Testing	$49,980.00	25500	tests	$1.96
Painting	$52,580.00	5258	Gallon	$10.00
Packing and shipping	$8,27,450.00	335000	Pounds	$2.47
Total	$15,74,800.00

Solution c:

Allocation of overhead and computation of overhead cost per unit
Activity cost pool	Home Model			Commercial Model
	Expected use of Drivers	Overehad rates	Cost Assigned	Expected use of Drivers	Overehad rates	Cost Assigned
Receiving	215000	$0.26	$55,900	120000	$0.26	$31,200
Forming	27000	$4.34	$1,17,180	8000	$4.34	$34,720
Assembling	165000	$1.87	$3,08,550	52000	$1.87	$97,240
Testing	15500	$1.96	$30,380	10000	$1.96	$19,600
Painting	3680	$10.00	$36,800	1578	$10.00	$15,780
Packing and shipping	215000	$2.47	$5,31,050	120000	$2.47	$2,96,400
Total			$10,79,860			$4,94,940
Nos of units			54000			10200
Overhead cost per unit			$20.00			$48.52

Solution d:

Computation of unit cost of each product - Activity Based costing - Combat Fire Inc.
Particulars	Home Model	Commercial Model
Direct material	$18.50	$26.50
Direct labor	$19.00	$19.00
Manufacturing overhead	$20.00	$48.52
Unit Product Cost	$57.50	$94.02

Solution e:

Activity	Classification
Receiving	Non value added activity
Forming	Value added activity
Assembling	Value added activity
Testing	Non value added activity
Painting	Value added activity
Packing and shipping	Value added activity