Combat Fire, Inc. manufactures steel cylinders and nozzles for two models of fir
ID: 2420203 • Letter: C
Question
Combat Fire, 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 hours x (54,000 + 10,200). Expected 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 identified six activity cost pools and related cost drivers and accumulated overhead by cost pool as followsExplanation / Answer
Answer:(f) (1) Activity-based costing shows the commercial model absorbs nearly 2.425 ($48.8 ÷ $20.12) times as much overhead per unit as the home model.
(2) The comparison of ABC and traditional costing shows that the proper amount of overhead assigned to the two products is not equal at $24.675 but rather $20.12 for the home model and $48.8 for the commercial model. Under traditional costing, the margin of error on the commercial model was almost 100%, an understatement of $24.125 on an assignment of $24.675. These distorted overhead assignments have likely led to overpricing the home model and underpricing the commercial model.