Question

Problem 4-1A

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 $1,568,500. Thus, the predetermined overhead rate is $16.29 or ($1,568,500 ÷ 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	Expected Use of Cost Drivers	Expected Use of Cost Drivers	Expected use of drivers by product Home	Expected use of drivers by product Commercial
Receiving	Pounds	$87,100	335,000	335,000	215,000	120,000
Forming	Machine Hours	157,500	35,000	35,000	27,000	8,000
Assembling	Number of parts	390,600	217,000	217,000	165,000	52,000
Testing	Number of tests	61,200	25,500	25,500	15,500	10,000
Painting	Gallons	36,806	5,258	5,258	3,680	1,578
Packing and shipping	Pounds	837,500	335,000	215,000	215,000	120,000
		$1,570,706

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

Total unit cost:

Home Model $_____
Commercial Model $______

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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 Pools	Estimated Overhead	Expected Use of Cost Drivers	--------------------------------------------	Activity-Based Overhead Rate	-------------------------------------------
Receiving	$		Pounds	$	Per pound
Forming	$		Machine Hours	$	Per machine hour
Assembling	$		Parts	$	Per part
Testing	$		Tests	$	Per test
Painting	$		Gallons	$	Per gallon
Packing and shipping	$		Pounds	$	Per pound
--------------	$	------------	-----------	-------------	-----------

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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.)

Activity Cost Pools	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)	---------------------------------------	------------------------------------	$	---------------------------------------	------------------------------------	$

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

Total cost per unit:

Home Model: $
Commercial Model: $

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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

Solution

Combat Fire Inc

1. Computation of total unit cost of each product under traditional costing system:

	Home	Commercial
Direct material	$18.50	$26.50
Direct labor	$19	$19
Manufacturing overhead	$24.43	$24.43
Total unit cost	$61.93	$69.93

Manufacturing overhead cost per unit –

Predetermined overhead rate = $1,568,800/96,300 hours = $16.29 per direct labor hour

Number of hours needed for each product = 1.5 hours

Overhead cost per unit = 16.29 x 1.5 hours = $24.43 per unit

1. Schedule showing computations of activity based overhead rates (per cost driver):

Activity Cost Pool	Estimated Overhead	Expected use of cost drivers	Activity Based overhead rates
Receiving	$87,100	335,000 pounds	$0.26 per pound
Forming	$157,500	35,000 machine hours	$4.50 per MH
Assembling	$390,600	217,000 parts	$1.80 per part
Testing	$61,200	25,500 tests	$2.40 per test
Painting	$36,806	5,258 gallons	$7 per gallon
Packing and Shipping	$837,500	335,000 pounds	$2.50 per pound

1. Schedule showing assigning of each activity cost pool to each product based on the use of cost drivers:

		Home				Commercial
Activity Cost Pool	Estimated Use of Drivers	Activity-Based Overhead Rates	Cost Assigned		Estimated Use of Drivers	Activity-Based Overhead Rates	Cost Assigned
Receiving	215,000 pounds	$0.26 per pound	$55,900		120,000 pounds	$0.26 per pound	$31,200
Forming	27,000MHs	$4.50 per MHr	$121,500		8,000 MH	$4.50 per MHr	$36,000
Assembling	165,000 parts	$1.80 per part	$297,000		52,000 parts	$1.80 per part	$93,600
Testing	15,500 tests	$2.40 per test	$37,200		10,000 tests	$2.40 per test	$24,000
Painting	3,680 gallons	$7.00 per galon	$25,760		1,578 gallons	$7.00 per galon	$11,046
Packing and Shipping	215,000 pounds	$2.50 per pound	$537,500		120,000 pounds	$2.50 per pound	$300,000
Total cost assigned (a)			$1,074,860				$495,846
Units produced (b)			54,000				10,200
Overhead cost per unit [(a)÷ (b)]			$19.90				$48.61

Computation of total cost per unit for each product under ABC:

	Home	Commercial
Direct material	$18.50	$26.50
Direct labor	$19	$19
Manufacturing overhead	$19.90	$48.61
Total unit cost	$57.40	$94.11

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

Activity
Receiving	Non-Value-Added
Forming	Value-Added
Assembling	Value-Added
Testing	Non-Value-Added
Painting	Value-Added
Packing and Shipping	Value-Added