FireOut, Inc. manufactures steel cylinders and nozzles for two models of fire extinguishers: (1) a home fire

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. 3 (54,000 1 10,200)]. Expected annual manufacturing overhead is $1,502,280. Thus, the predetermined overhead rate is $15.60 or ($1,502,280 4 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 the commercial models.

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

Activity Cost Pools Receiving Forming Assembling Testing Painting Packing and shipping Cost Drivers Kilograms

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 5-4).
(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.)
(d) Calculate 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.

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Related Book For  book-img-for-question

Managerial Accounting Tools for Business Decision Making

ISBN: 978-1118856994

4th Canadian edition

Authors: Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso, Ibrahim M. Aly

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