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 $ 1,578,800. Thus, the predetermined overhead rate is $ 16.39 or ($ 1,578,800 ÷ 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		$ 87,800		335,000		215,000		120,000
Forming		Machine hours		154,000		35,000		27,000		8,000
Assembling		Number of parts		407,000		217,000		165,000		52,000
Testing		Number of tests		45,000		25,500		15,500		10,000
Painting		Gallons		61,000		5,258		3,680		1,578
Packing and shipping		Pounds		824,000		335,000		215,000		120,000
				$ 1,578,800

(a)

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
Total unit cost		$ enter a dollar amount rounded to 2 decimal places		$ enter a dollar amount rounded to 2 decimal places

(b) Under ABC, prepare a schedule showing the computations of the activity-based overhead rates (per cost driver).

(round overhead rate to 2 decimal places.)

(c) 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 and cost assigned to 0 decimal places.)

(d) Compute the total cost per unit for EACH product under ABC.

Answer 1

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	$24.59	$24.59
Total unit cost	$62.09	$70.09

Manufacturing overhead cost per unit –

Predetermined overhead rate = $1,578,800/96,300 hours = $16.39 per direct labor hour

Number of hours needed for each product = 1.5 hours

Overhead cost per unit = 16.39 x 1.5 hours = $24.59 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	$87,800	335,000 pounds	$0.26 per pound
Forming	$154,000	35,000 machine hours	$4.40 per MH
Assembling	$407,000	217,000 parts	$1.88 per part
Testing	$45,000	25,500 tests	$1.76 per test
Painting	$61,000	5,258 gallons	$11.60 per gallon
Packing and Shipping	$824,000	335,000 pounds	$2.46 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	$4.40 per MHr	$118,800		8,000 MH	$4.40 per MHr	$35,200
Assembling	165,000 parts	$1.88 per part	$310,200		52,000 parts	$1.88 per part	$97,760
Testing	15,500 tests	$1.76 per test	$27,280		10,000 tests	$1.76 per test	$17,600
Painting	3,680 gallons	$11.60 per galon	$42,688		1,578 gallons	$11.60 per galon	$18,305
Packing and Shipping	215,000 pounds	$2.46 per pound	$528,900		120,000 pounds	$2.46 per pound	$295,200
Total cost assigned (a)			$1,083,768				$495,265
Units produced (b)			54,000				10,200
Overhead cost per unit [(a)÷ (b)]			$20.07				$48.56

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	$20.07	$48.56
Total unit cost	$57.57	$94.06