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-gallon cylinder that holds 2 1/2 pounds of multipurpose 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 produts require 1.5 hours of direct labor for completion. Therefore, total annual direct labor hours are 96,300 or [1.5 hrs. × (54,000 + 10,200)]. Expected annual manufacturing overhead is $1,502,280. Thus, the predetermined overhead rate is $15.60 or ($1,502,208 ÷ 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 $19 per unit for both the home and the commercial models.
The company's managers identified six activity cost pools and related cost drivers and accumulated overhead by cost pool as follows.
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Activity Cost Pools
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Cost Drivers
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Estimated Overhead
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Expected Use of Cost Drivers
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Expected Use of Drivers by Product
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Home
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Commercial
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Receiving
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Pounds
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$ 70,350
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335,000
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215,000
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120,000
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Forming
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Machine hours
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150,500
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35,000
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27,000
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8,000
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Assembling
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Number of parts
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390,600
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217,000
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165,000
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52,000
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Testing
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Number of tests
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51,000
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25,000
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15,000
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10,000
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Painting
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Gallons
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52,580
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5,258
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3,680
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1,578
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Packing and shipping
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Pounds
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787,250
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335,000
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215,000
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120,000
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$1,502,280
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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.
(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.