Problem 17-1A (Part Level Submission) Combat Fire, Inc. manufactures steel cylin
ID: 2566651 • Letter: P
Question
Problem 17-1A (Part Level Submission) 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 $1,577,300. Thus, the predetermined overhead rate is $16.38 or ($1,577,300 ÷ 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 Use of Drivers by Product Expected Use of Cost Drivers Estimated Overhead Activity Cost Pools Receiving Forming Assembling Testing Painting Packing and shipping Cost Drivers Pounds Machine hours Number of parts Number of tests Gallons Pounds $84,400 153,000 407,000 54,000 57,900 821,000 $1,577,300 335,000 215,000 35,000 27,000 217,000 165,000 15,500 3,680 335,000 215,000 Home Commercial 120,000 8,000 52,000 10,000 1,578 120,000 25,500 5,258Explanation / Answer
ans a Home Commercial Direct Material $18.50 $26.50 Direct Labor $19 $19 Overhead cost (1.5*16.38) 24.57 24.57 Cost per unit $62.07 $70.07 Predetermined Overhead rate 1577300/96300 16.38 Expected Use of Drivers by Product ans 2 Activity Cost Pools Cost Drivers Estimated Overhead O Expected Use of C Activity rate A=O/C Home H Cost allocated H*A Commercial C Cost allocated C*A Cost Drivers Receiving Pounds $84,400 335,000 $0.25 215,000 $54,167 120,000 $30,233 Forming Machine hours 153,000 35,000 $4.37 27,000 $118,029 8,000 $34,971 Assembling Number of parts 407,000 217,000 $1.88 165,000 $309,470 52,000 $97,530 Testing Number of tests 54,000 25,500 $2.12 15,500 $32,824 10,000 $21,176 Painting Gallons 57,900 5,258 $11.01 3,680 $40,523 1,578 $17,377 Packing and shipping Pounds 821,000 335,000 $2.45 215,000 $526,910 120,000 $294,090 $1,577,300 ans c Activity Cost Pools Activity rate A=O/C Home H Cost allocated H*A Commercial C Cost allocated C*A Receiving 0.25 215000 54167 120000 30233 Forming 4.37 27000 118029 8000 34971 Assembling 1.88 165000 309470 52000 97530 Testing 2.12 15500 32824 10000 21176 Painting 11.01 3680 40523 1578 17377 Packing and shipping 2.45 215000 526910 120000 294090 Total overhead cost 1081923 495377 No. of units 54000 10200 Overhead cost per unit 20.04 48.57 ans d ABC method Home Commercial Direct Material $18.50 $26.50 Direct Labor $19 $19 Overhead cost 20.04 48.57 Cost per unit $57.54 $94.07 ans e Forming Value added Assembling Value added Testing Non value added painting Value added Packing & shipping Value added ans f 1) The overhead cost as per traditional method is more for Home as compare to ABC method. The overhead cost as per traditional method is less for Commercial as compare to ABC method. This gives the incorrect cost per unit. As the result the Home cost is overstated and Commercial cost is understated 2) As the result of difference in overhead cost as per traditional method and ABC. The Home total cost is overstated and commercial cost is overstated