Question

P4.1A (LO 1, 2, 3), AP Combat Fire, Inc. manufactures steel cylinders and nozzles for two models of fi re extinguishers: (1) a home fi re extinguisher and (2) a commercial fi re 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)]. Estimated 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 identifi ed six activity cost pools and related cost drivers and accumulated overhead by cost pool as follows.

Estimated Estimated Use
Use of of Drivers by
Estimated Cost 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).
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.

Answer 1

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