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 $1,584,280. 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.

Activity Cost Pools		Cost Drivers		Estimated Overhead		Estimated Use of Cost Drivers		Estimated Use of Drivers by Product
								Home		Commercial
Receiving		Pounds		$80,400		335,000		215,000		120,000
Forming		Machine hours		150,500		35,000		27,000		8,000
Assembling		Number of parts		412,300		217,000		165,000		52,000
Testing		Number of tests		51,000		25,500		15,500		10,000
Painting		Gallons		52,580		5,258		3,680		1,578
Packing and shipping		Pounds		837,500		335,000		215,000		120,000
				$1,584,280

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.

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.

 

 

Chapter 5

P5.3A (LO 3, 4, 5)  Jorge Company bottles and distributes B-Lite, a diet soft drink. The beverage is sold for 50 cents per 16-ounce bottle to retailers. For the year 2020, management estimates the following revenues and costs.

Sales		$1,800,000		Selling expenses—variable		$70,000
Direct materials		430,000		Selling expenses—fixed		65,000
Direct labor		360,000		Administrative expenses—variable		20,000
Manufacturing overhead—variable		380,000		Administrative expenses—fixed		60,000
Manufacturing overhead—fixed		280,000

Instructions:

a.  Prepare a CVP income statement for 2020 based on management's estimates. (Show column for total amounts only).

b.  Compute the break-even point in (1) units and (2) dollars.

c.  Compute the contribution margin ratio and the margin of safety ratio. (Round to nearest full percent).

d.  Determine the sales dollars required to earn net income of $180,000.

 

 

Chapter 6

E6-17 (LO 5)  Siren Company builds custom fishing lures for sporting goods stores. In its first year of operations, 2020, the company incurred the following costs.

Variable Costs per Unit
Direct materials	$7.50
Direct labor	$3.45
Variable manufacturing overhead	$5.80
Variable selling and administrative expenses	$3.90
Fixed Costs per Year
Fixed manufacturing overhead	$225,000
Fixed selling and administrative expenses	$210,100

Siren Company sells the fishing lures for $25. During 2020, the company sold 80,000 lures and produced 90,000 lures.

Instructions:

a.   Assuming the company uses variable costing, calculate Siren's manufacturing cost per unit for 2020.

b.   Prepare a variable costing income statement for 2020.

c.   Assuming the company uses absorption costing, calculate Siren's manufacturing cost per unit for 2020.

d.   Prepare an absorption costing income statement for 2020.

 

Answer 1

(c).

Overhead allocation using ABC
					Products
Activity	Estimated	Cost driver		Cost per	Home		Commercial
cost pool	overhead	Name	Units	unit of	Cost driver	Overhead	Cost driver	Overhead
				cost driver	units	cost	units	cost
Receiving	80400	Pounds	335000	0.24	215000	51600	120000	28800
Forming	150500	Machine hours	35000	4.30	27000	116100	8000	34400
Assembling	412300	Number pf parts	217000	1.90	165000	313500	52000	98800
Testing	51000	Number of tests	25500	2.00	15500	31000	10000	20000
Painting	52580	Gallons	5258	10.00	3680	36800	1578	15780
Packing and shipping	837500	Pounds	335000	2.50	215000	537500	120000	300000
	1584280					1086500		497780
				Output		54000		10200
				Overhead cost per unit		20.12		48.80

(d) Total cost per unit

Details	Home	Commercial
Direct material	$18.50	$26.50
Direct labor	$19.00	$19.00
Manufacturing overhead	$20.12	$48.80
Total cost per unit	$57.52	$94.30

(e)

Activity cost pool	Value added / Non-value added
Receiving	Non-value added
Forming	Value added
Assembling	Value added
Testing	Non value aded
Painting	Value added
Packing and shipping	Value added

(f)

	Absorption costing		Activity based costing
	Home	Commercial	Home	Commercial
Direct material	18.50	26.50	18.50	26.50
Direct labor	19.00	19.00	19.00	19.00
Manufacturing overhead	24.68	24.68	20.12	48.80
Total Cost	62.18	70.18	57.62	94.30
1. Cost per unit of Home model is $62.18 under absorption costing where as
it is $57.62 under Acivity Based Costing.
2. Cost per unit of Home model is $70.18 under absorption costing where as
it is $94.30 under Acivity Based Costing.
3. This shows that the 'Commercial' model is using the cost driver as compared to
'Home' model per unit.

Answer 2

(a.)

• All working forms part of the answer
• Requirement: Per unit cost (Traditional Costing)

Working		Home fire-extinguisher	Commercial fire extinguisher
A	Units	54000	10200
B=A x Material cost per unit	Direct material cost	[54000 x 18.5] 999000	[10200 x 26.52] 70300
C=A x $19	Direct labor cost	[54000 x 19] 1026000	]10200 x 19]193800
D=B+C	Total variable costs	2025000	464100
E = A x 1.5 hours	Direct labor hours	81000	15300
F	Overhead rate per direct labor hour	16.45	16.45
G=E x F	Manufacturing overhead allocated	1332450	251685
H=D + G	Total cost	3357450	715785
I = H / A	Cost per unit	62.175 or $62.18	70.175 or $70.18