Question

P17-1A Assign overhead using traditional costing and ABC; compute unit costs; classify activities as value- or non-value-added

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

Value

Value

Direct labor

Value

Value

Overhead

Value

Value

Total unit cost

?

?

Expected Use of Drivers

Estimated

÷

Expected Use of

=

Activity-Based

(b)

Activity Cost Pool

Overhead

Cost Drivers

OH Rate

Receiving

Value

Value

Pounds

?

Forming

Value

Value

MH

?

Assembling

Value

Value

Parts

?

Testing

Value

Value

Tests

?

Painting

Value

Value

Gallons

?

Packing and shipping

Value

Value

Pounds

?

?

(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

Value

Value

?

Value

Value

?

Forming

Value

Value

?

Value

Value

?

Assembling

Value

Value

?

Value

Value

?

Testing

Value

Value

?

Value

Value

?

Painting

Value

Value

?

Value

Value

?

Packing and shipping

Value

Value

?

Value

Value

?

Total cost assigned (a)

?

?

Units produced

Value

Value

OH cost per unit (a) +(b)

?

?

Home

Commercial

(d)

ABC Manufacturing Costs

Model

Model

Direct materials

Value

Value

Direct labor

Value

Value

Overhead

Value

Value

Total cost per unit

?

?

(e )

Activity

Value- vs. Non-Value-Added

Receiving

classification

Forming

classification

Assembly

classification

Testing

classification

Painting

classification

Packing and shipping

classification

(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.

Answer 1

Solution:

Part a --- Total Unit Cost under traditional product costing

	Products
Manufacturing Costs	Home Model	Commercial Model
Direct Materials	$18.50	$26.50
Direct labor	$19.00	$19.00
Overhead	$24.68 (1.5 DLHs x $16.45)	$24.68 (1.5 DLHs x $16.45)
Total Unit Cost	$62.18	$70.18

Part b --- schedule showing the computations of the activity-based overhead rates (per cost driver)

Activity Cost Pool	Estimated Overhead	÷	Estimated Use of Cost Drivers		=	Activity-Based OH Rate
Receiving	80400		335000	Pounds		$0.24
Forming	150500		35000	MH		$4.30
Assembling	412300		217000	Parts		$1.90
Testing	51000		25500	Tests		$2.00
Painting	52580		5258	Gallons		$10.00
Packing and shipping	837500		335000	Pounds		$2.50
	1584280

Part c --- schedule assigning each activity's overhead cost pool to each product based on the use of cost drivers.

	Home Model					Commercial Model
Activity Cost Pool	Estimated Use of Cost Drivers	x	Activity Based OH Rates	=	Cost Assigned	Estimated Use of Cost Drivers	x	Activity Based OH Rates	=	Cost Assigned
Receiving	215000		$0.24		$51,600	120000		$0.24		$28,800
Forming	27000		$4.30		$116,100	8000		$4.30		$34,400
Assembling	165000		$1.90		$313,500	52000		$1.90		$98,800
Testing	15500		$2.00		$31,000	10000		$2.00		$20,000
Painting	3680		$10.00		$36,800	1578		$10.00		$15,780
Packing and shipping	215000		$2.50		$537,500	120000		$2.50		$300,000
Total Cost assigned (a)					$1,086,500					$497,780
Units Produced (b)					54,000					10,200
OH cost per unit (a / b)					$20.12					$48.80

Part d --- total cost per unit for each product under ABC.

	Products
Manufacturing Costs	Home Model	Commercial Model
Direct Materials	$18.50	$26.50
Direct labor	$19.00	$19.00
Overhead (Refer Part c)	$20.12	$48.80
Total Unit Cost	$57.62	$94.30

Part e --- Value added and non value added activities

Value Added activity is the activity which added the value in product or turns into more usable or useful to the customer.

Non Value Added activity does not add any usable or useful feature in the product.

Activity	Value v/s Non Value Added
Receiving	Non Value Added
Forming	Non Value Added
Assembling	Value Added
Testing	Value Added
Painting	Value Added
Packing and shipping	Value Added

Part f ---

Under traditional costing system, a predetermined overhead rate is used to allocate the manufacturing overhead costs to the product. Predetermined Overhead Rate is the estimated overhead rate calculated by estimating the total overhead for the period and suitable allocation base. Allocation base may be direct labor hour, direct labor cost or machine hours.

Activity Based Costing System

- ABC is a costing method which identifies the activities in the organization and assigns the cost of each activity with resources to all the products or services according to the actual consumption of activity by the product or service.

- This system determines all the activities related to product or production process.

- This system calculates the cost of those activities which are related to product or production process and thereafter determine the cost of the product.

- In ABC costing the overhead costs are distributed to the product on the basis of benefit received from indirect activity.

- It helps to distribution of overheads on the basis of activities.

The Activity based overhead rate = Estimated Overheads related to the activity / Total Cost Driver per activity or Expected Total Activity)

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