Question

Assign overhead using traditional costing and ABC; compute unit costs;
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 x (54,000 + 10,200)]. Expected annual manufacturing
overhead is $1,584,280. Thus, the predetermined overhead rate is $16.45 or ($1,584,280 ÷ 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.
								Estimated		Expected Use of
						Estimated		Use of Cost		Drivers by Product
Activity Cost Pools			Cost Drivers			Overhead		Drivers		Home		Commercial
Receiving			Pounds			$80,400		335,000		215,000		120,000
Forming			Machine hours			150,500		35,000		27,000		8,000
Assembling			Number of parts			412,300		217,000		165,000		52,000
Testing			Number of tests			51,000		25,500		15,500		10,000
Painting			Gallons			52,580		5,258		3,680		1,578
Packing and shipping			Pounds			837,500		335,000		215,000		120,000
						$1,584,280
Instructions
(a) Under traditional product costing, compute the total unit cost of each product. Prepare a simple comparative
schedule of the individual costs by product (similar to Illustration 4-3 on page 5).
(b) Under ABC, prepare a schedule showing the computations of the activity-based overhead rates (per cost driver).
(c) Prepare a schedule assigning each activity's overhead cost pool to each product based on the use of cost drivers.
(Include a computation of overhead cost per unit, rounding to the nearest cent.)
(d) Compute the total cost per unit for each product under ABC.
(e) Classify each of the activities as a value-added activity or a non-value-added activity.
(f) Comment on (1) the comparative overhead cost per unit for the two products under ABC, and (2) the comparative
total costs per unit under traditional costing and ABC.
NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .
				Products
(a)	Manufacturing Costs			Home Model		Commercial Model
	Direct materials			$                               18.50		$              26.50
	Direct labor			$                               19.00		$              19.00
	Overhead			$                               24.68		$              23.68
	Total unit cost			$                               62.18		$              69.18
								Expected Use of Drivers
				Estimated	÷	Expected Use of			=	Activity-Based
(b)	Activity Cost Pool			Overhead		Cost Drivers				OH Rate
	Receiving			$                        80,400.00		$     335,000.00		Pounds		$0.24
	Forming			$                      150,500.00		$       35,000.00		MH		$4.30
	Assembling			$                      412,300.00		$     217,000.00				$1.90
	Testing			$                        51,000.00		$       25,500.00		Tests		$2.00
	Painting			$                        52,580.00		$         5,258.00		Gallons		$10.00
	Packing and shipping			$                      837,500.00		$     335,000.00		Pounds		$2.50
				$                      158,428.00
(c)				Home Model						Commercial Model
				MH	x	Activity-Based	=	Cost		Expected Use	x	Activity-Based	=	Cost
	Activity Cost Pool			of Drivers		OH Rates		Assigned		of Drivers		OH Rates		Assigned
	Receiving			$                      215,000.00		$0.24		$                     51,600.00		$     120,000.00		$0.24		$   28,800.00
	Forming			$                        27,000.00		$4.30		$                   116,100.00		$         8,000.00		$4.30		$   34,400.00
	Assembling			$                      165,000.00		$1.90		$                   313,500.00		$       52,000.00		$1.90		$   98,800.00
	Testing			$                        15,500.00		$2.00		$                     31,000.00		$       10,000.00		$2.00		$   20,000.00
	Painting			$                          3,680.00		$10.00		$                     36,800.00		$         1,578.00		$10.00		$   15,780.00
	Packing and shipping			$                      215,000.00		$2.50		$                   537,500.00		$     120,000.00		$2.50		$ 300,000.00
	Total cost assigned (a)							$                1,086,500.00						$ 497,780.00
	Units produced							$                     54,000.00						$   10,200.00
	OH cost per unit (a) +(b)							$                            20.12						$          48.80

Assume that total estimated overhead costs for Receiving, Assembly and Painting changed to $110,400, $425,000, and $72,600 respectively. Redo instructions (a) to (c ) and round overhead rates to two decimal points.

Answer 1