Expected Use of Drivers by Product Activity Cost Pools Cost

Expected Use of
Drivers by Product

Activity Cost Pools

Cost Drivers

Estimated Overhead

Expected Use of
Cost Drivers

Home

Commercial

$86,200

335,000

215,000

120,000

155,000

35,000

27,000

8,000

413,000

217,000

165,000

52,000

47,000

25,500

15,500

10,000

60,800

5,258

3,680

1,578

823,000

335,000

215,000

120,000

$1,585,000

(a)

Home Model

Commercial Model

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 × (54,000 + 10,200)]. Expected annual manufacturing overhead is $1,585,000. Thus, the predetermined overhead rate is $16.46 or ($1,585,000 ÷ 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 Activity Cost Pools Cost Drivers Estimated Overhead Expected Use of Cost Drivers Home Commercial Receiving Pounds $86,200 335,000 215,000 120,000 Forming Machine hours 155,000 35,000 27,000 8,000 Assembling Number of parts 413,000 217,000 165,000 52,000 Testing Number of tests 47,000 25,500 15,500 10,000 Painting Gallons 60,800 5,258 3,680 1,578 Packing and shipping Pounds 823,000 335,000 215,000 120,000 $1,585,000

Solution

Answers

Working

Home Model

Commercial Model

A [given]

Direct Material cost per unit

$                                          18.50

$                     26.50

B [given]

Direct Labor cost per unit

$                                          19.00

$                     19.00

C [given]

Direct Labor hour per unit

1.5

1.5

D [given]

Predetermined Overhead rate per labor hour

$                                          16.46

$                     16.46

E = C x D

Manufacturing Overhead cost

$                                          24.69

$                     24.69

F = A + B + E

Total Unit Cost under Traditional Method

$                                          62.19

$                     70.19

Home Model

Commercial Model

Total unit cost

$                                          62.19

$                     70.19

Working		Home Model	Commercial Model
A [given]	Direct Material cost per unit	$                                          18.50	$                     26.50
B [given]	Direct Labor cost per unit	$                                          19.00	$                     19.00
C [given]	Direct Labor hour per unit	1.5	1.5
D [given]	Predetermined Overhead rate per labor hour	$                                          16.46	$                     16.46
E = C x D	Manufacturing Overhead cost	$                                          24.69	$                     24.69
F = A + B + E	Total Unit Cost under Traditional Method	$                                          62.19	$                     70.19