Cost Drivers Steel Production
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Greatest Hits. Cost analysis, a more complex process, is a thorough assessment of the direct and indirect costs leading to the final price of the product or service. Once either of these strategies is applied and expenses are identified, negotiation may be necessary to ensure the best price.
See the answerProblem 17-1A (Part Level Submission)
FireOut, Inc. manufactures steel cylinders and nozzles for twomodels 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 ofmultipurpose dry chemical at 480 PSI. The commercial model is alow-volume (10,200 units), two-gallon cylinder that holds 10 poundsof multi-purpose dry chemical at 390 PSI. Both products require 1.5hours of direct labor for completion. Therefore, total annualdirect labor hours are 96,300 or [1.5 hrs. x (54,000 + 10,200)].Expected annual manufacturing overhead is $ 1,557,080 . Thus, thepredetermined overhead rate is $ 16.17 or ($ 1,557,080 ÷ 96,300)per direct labor hour. The direct materials cost per unit is $18.50for the home model and $26.50 for the commercial model. The directlabor cost is $19 per unit for both the home and the commercialmodels.
The company’s managers identified six activity cost pools andrelated cost drivers and accumulated overhead by cost pool asfollows.
Expected Use of
Activity Cost Pools Cost Drivers Estimated Overhead Cost DriversHome Commercial
Receiving Pounds $75,000 335,000 215,000 120,000
Forming Machine hours 153,300 35,000 27,000 8,000
Assembling Number of parts 401,500 217,000 165,000 52,000
Testing Number of tests 51,300 25,500 15,500 10,000
Painting Gallons 52,580 5,258 3,680 1,578
Packing and shipping Pounds 823,400 335,000 215,000 120,000
$1,557,080
Under traditional product costing, compute the total unit cost ofeach product. (Round answers to 2 decimal places, e.g.$12.25.)
Total unit cost Commercial Model Home Model
$ $
Exercise 17-13 (Part Level Submission)
Healthy Products, Inc., uses a traditional product costing systemto assign overhead costs uniformly to all products. To meet Foodand Drug Administration requirements and to assure its customers ofsafe, sanitary, and nutritious food, Healthy engages in a highlevel of quality control. Healthy assigns its quality-controloverhead costs to all products at a rate of 17% of direct laborcosts. Its direct labor cost for the month of June for itslow-calorie dessert line is $58,600. In response to repeatedrequests from its financial vice president, Healthy’s managementagrees to adopt activity-based costing. Data relating to thelow-calorie dessert line for the month of June are asfollows.
Activity Cost Pools
Cost Drivers
Overhead
Rate
Number of Cost Drivers
Used per Activity
Inspections of material received Number of pounds $0.80 per pound5,830 pounds
In-process inspections Number of servings $0.33 per serving 9,900servings
FDA certification Customer orders $12.00 per order 460 orders
Compute the quality-control overhead cost to be assigned to thelow-calorie dessert product line for the month of June (1) usingthe traditional product costing system (direct labor cost is thecost driver), and (2) using activity-based costing.
Quality-control overhead cost to be assigned Activity-based costingTraditional product costing
$ $
Problem 17-3A (Part Level Submission)
Thakin Stairs Co. designs and builds factory-made premium woodenstairways for homes. The manufactured stairway components(spindles, risers, hangers, hand rails) permit installation ofstairways of varying lengths and widths. All are of white oak wood.Budgeted manufacturing overhead costs for the year 2014 are asfollows.
Overhead Cost Pools Amount
Purchasing $69,600
Handling materials 82,720
Production (cutting, milling, finishing) 219,000
Setting up machines 100,000
Inspecting 120,000
Inventory control (raw materials and finished goods) 142,800
Utilities 450,000
Total budget overhead costs $1,184,120
For the last 4 years, Thakin Stairs Co. has been charging overheadto products on the basis of machine hours. For the year 2014,100,000 machine hours are budgeted.
Jeremy Nolan, owner-manager of Thakin Stairs Co., recently directedhis accountant, Bill Seagren, to implement the activity-basedcosting system that he has repeatedly proposed. At Jeremy Nolan’srequest, Bill and the production foreman identify the followingcost drivers and their usage for the previously budgeted overheadcost pools.
Expected Use of
Activity Cost Pools Cost Drivers Cost Drivers
Purchasing Number of orders 600
Handling materials Number of moves 8,000
Production (cutting, milling, finishing) Direct labor hours100,000
Setting up machines Number of setups 1,250
Inspecting Number of inspections 6,000
Inventory control (raw materials and finished goods) Number ofcomponents 168,000
Utilities Square feet occupied 90,000
Steve Hannon, sales manager, has received an order for 250stairways from Community Builders, Inc., a large housingdevelopment contractor. At Steve’s request, Bill prepares costestimates for producing components for 250 stairways so Steve cansubmit a contract price per stairway to Community Builders. Heaccumulates the following data for the production of 250stairways.
Direct materials $103,800
Direct labor $112,500
Machine hours 15,000
Direct labor hours 5,600
Number of purchase orders 60
Number of material moves 800
Number of machine setups 100
Number of inspections 450
Number of components 16,000
Number of square feet occupied 8,000
Compute the predetermined overhead rate using traditional costingwith machine hours as the basis. (Round answers to 2 decimalplaces, e.g. $12.25.)
Predetermined overhead rate
$
per machine hour
Expert Answer
Cost Drivers Steel Production
