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)]. Expected annual manufacturing overhead is $1,570,706. Thus, the predetermined overhead rate is $16.31 or ($1,570,706 ÷ 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 Estimated Expected Use of
Cost Pools Drivers Overhead Cost Drivers Home Commercial
Receiving Pounds $87,100 335,000 215,000 120,000
Forming Machine hours 157,500 35,000 27,000 8,000
Assembling Number of parts 390,600 217,000 165,000 52,000
Testing Number of tests 61,200 25,500 15,500 10,000
Painting Gallons 36,806 5,258 3,680 1,578
Packing and Pounds 837,500 335,000 215,000 120,000
shipping
$1,570,706
1.) Under traditional product costing, compute the total unit cost of each product. (Round answers to 2 decimal places, e.g. 12.25.)
2.) Under ABC, complete the schedule showing the computations of the activity-based overhead rates (per cost driver). (Round your answers to 2 decimal places, e.g. 2.25.)
3.) Complete the schedule assigning each activity's overhead cost pool to each product based on the use of cost drivers. (Use rates from part b above and round cost assigned to 0 decimal places, e.g. 12,250. Round overhead per unit to 2 decimal places, e.g. 2.25. Note that due to rounding your total cost assigned will be slightly different than calculated above.)
Cost Driver Home Model
Commercial Model
Cost Assigned
4.) Compute the total cost per unit for each product under ABC. (Round your answers to 2 decimal places, e.g. 12.25.)
Home Model $
Commercial Model $
5.)Classify each of the activities as a value-added activity or a non-value-added activity.
Activity
Receiving value-addednon-value-added
Forming non-value-addedvalue-added
Assembling value-addednon-value-added
Testing value-addednon-value-added
Painting non-value-addedvalue-added
Packing and shipping value-addednon-value-added

Answer 1

Combat Fire, Inc.

1) Computation of the total unit cost of each product:

Home Commercial Total

Direct materials cost $999,000 $270,300 $1,269,300

Direct labor cost 1,539,000 290,700 1,829,700

Overhead cost 1,321,110 249,543 1,570,653

Total costs $3,859,110 $810,543 $4,669,653

Unit cost $71.47 $79.47

2) Computations of the activity-based overhead rates:

Activity Rates

Receiving $0.26 ($87,100/335,000)

Forming $4.50 ($157,500/35,000)

Assembling $1.80 ($390,600/217,000)

Testing $2.40 ($61,200/25,500)

Painting $7.00 ($36,806/5,258)

Packing & Shipping $2.50 ($837,500/335,000)

3) Schedule Assigning Overhead Cost based on activity:

Activity Rates Home Commercial

Receiving $0.26 $55,900 $31,200

Forming $4.50 121,500 36,000

Assembling $1.80 297,000 93,600

Testing $2.40 37,200 24,000

Painting $7.00 25,760 11,046

Packing & Shipping $2.50 537,500 300,000

Total overhead $1,074,860 495,846

4) Computation of the total cost per unit under ABC:

Home Commercial Total

Direct materials cost $999,000 $270,300 $1,269,300

Direct labor cost 1,539,000 290,700 1,829,700

Overhead cost 1,074,860 495,846 1,570,706

Total costs $3,612,860 $1,056,846 $4,669,706

Unit cost $66.90 $103.61

5. Classification of activities as a value-added or non-value-added activities:

Activity

Receiving non-value-added

Forming value-added

Assembling value-added

Testing non-value-added

Painting value-added

Packing and shipping non-value-added

Step-by-step explanation:

Total annual direct labor hours = 96,300

Fire Extinguishers

Home Commercial Total

Units (volume) 54,000 10,200

Direct labor hours 81,000 15,300 96,300

Manufacturing overhead = $1,570,706

Predetermined overhead rate = $16.31 ($1,570,706/96,300)

Direct materials cost $18.50 $26.50

Direct labor costs $19 $19

Cost Pools Drivers Overhead Cost Drivers Home Commercial

Receiving Pounds $87,100 335,000 215,000 120,000

Forming Machine hours 157,500 35,000 27,000 8,000

Assembling Number (parts) 390,600 217,000 165,000 52,000

Testing Number of tests 61,200 25,500 15,500 10,000

Painting Gallons 36,806 5,258 3,680 1,578

Packing & Pounds 837,500 335,000 215,000 120,000

shipping

$1,570,706

Activity Rates Home Commercial

Receiving $0.26 $55,900 $31,200

Forming $4.50 121,500 36,000

Assembling $1.80 297,000 93,600

Testing $2.40 37,200 24,000

Painting $7.00 25,760 11,046

Packing & Shipping $2.50 537,500 300,000

Total overhead $1,074,860 495,846

Home Commercial Total

Units (volume) 54,000 10,200

Direct labor hours 81,000 15,300 96,300

Direct materials $18.50 $26.50

Direct labor costs $19 $19

Traditional (Predetermined Overhead Rate):

Home Commercial Total

Direct materials cost $999,000 $270,300 $1,269,300

Direct labor cost 1,539,000 290,700 1,829,700

Overhead cost 1,321,110 249,543 1,570,653

Total costs $3,859,110 $810,543 $4,669,653

Unit cost $71.47 $79.47

ABC:

Home Commercial Total

Direct materials cost $999,000 $270,300 $1,269,300

Direct labor cost 1,539,000 290,700 1,829,700

Overhead cost 1,074,860 495,846 1,570,706

Total costs $3,612,860 $1,056,846 $4,669,706

Unit cost $66.90 $103.61