Question

7

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)]. Expected annual manufacturing overhead is $1,577,000. Thus, the predetermined overhead rate is $16.38 or ($1,577,000 ÷ 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:

								Expected Use of Drivers by Product
Activity Cost Pools		Cost Drivers		Estimated Overhead		Expected Use of Cost Drivers		Home		Commercial
Receiving		Pounds		$88,200		335,000		215,000		120,000
Forming		Machine hours		152,000		35,000		27,000		8,000
Assembling		Number of parts		410,000		217,000		165,000		52,000
Testing		Number of tests		53,000		25,500		15,500		10,000
Painting		Gallons		53,800		5,258		3,680		1,578
Packing and shipping		Pounds		820,000		335,000		215,000		120,000
				$1,577,000

Under traditional product costing, compute the total unit cost of each product. (Round answers to 2 decimal places, e.g. 12.25.)

		Home Model		Commercial Model

eTextbook and Media

  

  

Under ABC, prepare a schedule showing the computations of the activity-based overhead rates (per cost driver). (Round overhead rate to 2 decimal places, e.g. 12.25.)

Activity Cost Pool		Estimated Overhead		Expected Use of Cost Drivers				Activity-Based Overhead Rate
Receiving
Forming
Assembling
Testing
Painting
Packing and shipping

  

Prepare a schedule assigning each activity’s overhead cost pool to each product based on the use of cost drivers. (Round overhead cost per unit to 2 decimal places, e.g. 12.25 and cost assigned to 0 decimal places, e.g. 2,500.)

		Home Model						Commercial Model
Activity Cost Pool		Expected Use of Drivers		Activity-Based Overhead Rates		Cost Assigned		Expected Use of Drivers		Activity-Based Overhead Rates		Cost Assigned
Receiving
Forming
Assembling
Testing
Painting
Packing and shipping
Total costs assigned (a)
Units produced (b)
Overhead cost per unit [(a) ÷ (b)]

Compute the total cost per unit for each product under ABC. (Round answer to 2 decimal places, e.g. 12.25.)

		Home Model		Commercial Model
Total cost per unit		$enter a dollar amount rounded to 2 decimal places		$enter a dollar amount rounded to 2 decimal places

Classify each of the activities as a value-added activity or a non–value-added activity.

Activity
Receiving
Forming
Assembling
Testing
Painting
Packing and shipping

Answer 1

Calculations of unit cost under traditional method. Direct Material Direct Labor Overhead cost ($ 16.38 x 1.50 hr) Total Unit Cost Commercial Home Model Model $ 18.50 $ 26.50 Given $ 19.00 $ 19.00 Given $ 24.57 $ 24.57 Predetermined overhead rate x direct labor hour used $ 62.07 $ 70.07 Schedule Showing computation of activity based overhead rates (per cost driver). Activity based overhead rate = Estimated Overhead / Expected use of cost driver (A) (B) (A)/(B) Estimated Overhead Activity cost pool Expected use of cost driver Activity based overhead rate $ $ $ $ Receiving Forming Assembling Testing Painting Packaging & Shipping 88,200 152,000 410,000 53,000 53,800 820,000 1,577,000 335000 Pounds 35000 Machine hour 17000 Parts 25500 Tests 5258 Gallons 335000 Pounds 0.26 Per Pound 4.34 Per Machine Hour 1.89 Per Part 2.08 Per Test 10.23 Per Gallon 2.45 Per Pound $ $ $ $ $ $ $ To caculate activity rate, divide Estimated overhead by Expected use of cost driver.

Schedule showing assigning of each product based on the use of cost driver Cost Assigned = Expected Cost driver x Activity based overhead rate (A) (B) (A) x (B) Activity cost pool Home Model Expected Cost Activity based driver overhead rate Cost Assigned Receiving 215000 $ 0.26 $ 56,606 Forming 27000 $ 4.34 $ 117,257 Assembling 165000 $ 1.89 $ 311,751 Testing 15500 $ 2.08 S 32,216 Painting 3680 $ 10.23 S 37,654 Packaging & Shipping 215000 $ 2.45 $ 526,269 (A) (B) (A) x (B) Commercial Model Expected Cost Activity based driver overhead rate Cost Assigned 120000 $ 0.26 $ 31,594 8000 $ 4.34 $ 34,743 520000 $ 1.89 $ 98,249 10000 $ 2.08 $ 20,784 1578 $ 10.23 $ 16,146 120000 $ 2.45 $ 293,731 $ $ Total Cost Assigned Units Produced Overhead Cost Per Unit (a) (b) (a)/(b) 1,081,752 54,000 495.248 10,200 $ 20.03 $ 48.55 Calculate activity rate and multiply it with expected cost driver. Total cost per unit under ABC method: Direct Material Direct Labor Overhead cost Total Unit Cost Commercial Home Model Model $ 18.50 $ 26.50 Given $ 19.00 $ 19.00 Given $ 20.03 $ 48.55 calculated above $ 57.53 94.05 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.