Question

FireOut 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-litre cylinder that holds 2.5 kilograms of multi-purpose dry chemical at 480 PSI (pounds per square inch). The commercial model is a low-volume (10,200 units), two-litre cylinder that holds 10 kilograms of multi-purpose dry chemical at 390 PSI. Both products require 1.5 hours of direct labour for completion. Therefore, total annual direct labour hours are 96,300 or [1.5 hrs. × (54,000 + 10,200)]. Estimated annual manufacturing overhead is $1,502,280. Thus, the predetermined overhead rate is $15.60 or ($1,502,280 ÷ 96,300) per direct labour hour. The direct materials cost per unit is $18.50 for the home model and $26.50 for the commercial model. The direct labour cost is $19 per unit for both the home and commercial models.

The company's managers identified six activity cost pools and related cost drivers, and estimated overhead by cost pool as follows:

Instructions

a.  Under traditional product costing, calculate the total unit cost of each product. Prepare a simple comparative schedule of the individual costs by product (similar to Illustration 5.3).

a. Unit cost—Home model $60.90

b.  Under ABC, prepare a schedule showing the calculations 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 calculation of overhead cost per unit, rounding to the nearest cent.)

c. Cost assigned—Home model $1,031,300

d.  Calculate the total cost per unit for each product under ABC.

d. Cost/unit—Home model $56.60

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.

Answer 1