Expected Use of Drivers by Product Activity Cost Pools Cost Drivers Estimated Ov
ID: 2467043 • Letter: E
Question
Expected Use of
Drivers by Product
Activity Cost Pools
Cost Drivers
Estimated Overhead
Expected Use of
Cost Drivers
Home
Commercial
$ 70,900
335,000
215,000
120,000
151,800
35,000
27,000
8,000
407,500
217,000
165,000
52,000
46,000
25,500
15,500
10,000
63,096
5,258
3,680
1,578
825,000
335,000
215,000
120,000
$ 1,564,296
(a)
Home Model
Commercial Model
(b) Under ABC, prepare a schedule showing the computation of the activity-based overhead rates (per cost driver).
(round overheard rate to 2 decimal places, e.g. $12.25).
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-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 $ 1,564,296 . Thus, the predetermined overhead rate is $ 16.24 or ($ 1,564,296 ÷ 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 $19 per unit for both the home and the commercial models.The company’s managers identified six activity cost pools and related cost drivers and accumulated overhead by cost pool as follows.
Expected Use of
Drivers by Product
Activity Cost Pools
Cost Drivers
Estimated Overhead
Expected Use of
Cost Drivers
Home
Commercial
Receiving Pounds$ 70,900
335,000
215,000
120,000
Forming Machine hours151,800
35,000
27,000
8,000
Assembling Number of parts407,500
217,000
165,000
52,000
Testing Number of tests46,000
25,500
15,500
10,000
Painting Gallons63,096
5,258
3,680
1,578
Packing and shipping Pounds825,000
335,000
215,000
120,000
$ 1,564,296
Explanation / Answer
a. In traditional costing total manufacturing overhead is divided by total number of units produced or total direct labor hours. The total unit cost for Home model and commercial model using traditional method is as under: Home Model Commercial Model Direct material cost $ 18.50 $ 26.50 Direct labor cost $ 19.00 $ 19.00 Manufacturing overhead(1.5 hours @$16.24 per hr) $ 24.36 $ 24.36 Total cost per unit $ 61.86 $69.86 b. Under ABC, the computation of activity based overhead rates per cost driver is as under: Estimated cost Expected cost drivers Total cost Cost per cost driver Cost assigned (A) Home (1) Commercial (2) B=(1+2) C=A/B Home Commercial Receiving $ 70,900 215,000 120,000 335,000 $0.21 $ 45,502.99 $ 25,397.01 Forming $ 151,800 27000 8000 35,000 $ 4.34 $ 117,102.86 $ 34,697.14 Assembly $ 407,500 165000 52000 217,000 $1.88 $ 309,850.23 $ 97,649.77 Testing $ 46,000 15500 10000 25,500 $1.80 $ 27,960.78 $ 18,039.22 Painting $63,096 3680 1578 5,258 $ 12.00 $ 44,160.00 $ 18,936.00 Packing and shipping $ 825,000 215000 120000 335,000 $ 2.46 $ 529,477.61 $ 295,522.39 $ 1,564,296 $ 1,074,054 $ 490,242 Total units produced $ 54,000 $ 10,200 Units produced $ 19.89 $ 48.06 Cost per unit The total unit cost for Home model and commercial model using traditional method is as under: Home Model Commercial Model Direct material cost $ 18.50 $26.50 Direct labor cost $ 19.00 $ 19.00 Manufacturing overhead per unit $ 19.89 $48.06 Total cost per unit $ 57.39 $93.56
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