P4-1A 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 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 hrs. 3 (54,000 1 10,200)]. Expected annual manufacturing overhead is $1,557,480. Thus, the predetermined overhead rate is $16.17 or ($1,557,480 4 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.

 

 

 

 

182    4 Activity-Based Costing

 

Expected                      Expected Use

Use of                       of Drivers by Estimated                              Cost                             Product               

 

Activity Cost Pools	Â	Cost Drivers	Â	Overhead	Â	Drivers	Â	Home	Â	Commercial
Receiving	Â	Pounds	Â	$     70,350	Â	335,000	Â	215,000	Â	120,000
Forming	Â	Machine hours	Â	150,500	Â	35,000	Â	27,000	Â	8,000
Assembling	Â	Number of parts	Â	412,300	Â	217,000	Â	165,000	Â	52,000
Testing	Â	Number of tests	Â	51,000	Â	25,500	Â	15,500	Â	10,000
Painting	Â	Gallons	Â	52,580	Â	5,258	Â	3,680	Â	1,578
Packing and shipping	Â	Pounds	Â	820,750	Â	335,000	Â	215,000	Â	120,000

$1,557,480

 

 

 

 

 

 

 

 

 

 

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 4-10 on page 152).

(b)   Under ABC, prepare a schedule showing the computations of the activity-based over- head 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.