P4-1A FireOut, Inc. manufactures steel cylinders and nozzles for two models of fire ex- tinguishers: (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 products require 1.5 hours of direct labor for completion. Therefore, total annual direct labor hours are 96,300 or [1.5 hrs. X (54,000 + 10,200)]. Expected annual manufacturing overhead is $1,502,280. Thus, the predetermined overhead rate is $15.60 or ($1,502,280 --- 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.

Expected             Expected  Use Use of                      of Drivers by

Estimated          Cost                      Product              

 

Activity Cost Pools	Cost Drivers	Overhead	Â	Drivers	Â	Home	Commercial
Receiving	Pounds	$     70,350	Â	335,000	Â	215,000	120,000
Forming	Machine hours	150,500	Â	35,000	Â	27,000	8,000
Assembling	Number of parts	390,600	Â	217,000	Â	165,000	52,000
Testing	Number of tests	51,000	Â	25,500	Â	15,500	10,000
Painting	Gallons	52,580	Â	5,258	Â	3,680	1,578
Packing and shipping	Pounds	787,250	Â	335,000	Â	215,000	120,000

$1,502,280

 

 

 

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 4-10 on page 158).

(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, round- ing 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.