Question

Problem 4-1A Combat Fire, Inc. manufactures steel cylinders and nozzles for two models of fire extinguishers:...

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

-------------------------------------------------------------------------------------------------------

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 $______

--------------------------------------------------------------------------------------------

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

--------------

$

------------

-----------

-------------

-----------

----------------------------------------------------------------

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)

---------------------------------------

------------------------------------

$

---------------------------------------

------------------------------------

$

--------------------------------------------------------------------------------------------

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: $

----------------------------------------------------------------------------------------------

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:

Homework Answers

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

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