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value-added activity or a non-value-added activity

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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 produts require 1.5 hours of direct labor for completion. Therefore, total annual direct labor hours are 96,300 or [1.5 hrs. × (54,000 + 10,200)]. Expected annual manufacturing overhead is $1,502,280. Thus, the predetermined overhead rate is $15.60 or ($1,502,208 ÷ 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.

Activity Cost Pools Cost Drivers Estimated Overhead Expected Use of Cost Drivers Expected Use of Drivers by Product
Home Commercial
Receiving Pounds $ 70,350 335,000 215,000 120,000
Forming Machine hours 150,500 35,000 27,000 8,000
Assembling Number of parts 390,600 217,000 165,000 52,000
Testing Number of tests 51,000 25,000 15,000 10,000
Painting Gallons 52,580 5,258 3,680 1,578
Packing and shipping Pounds 787,250 335,000 215,000 120,000
$1,502,280

Hint:
Assign overhead using traditional costing and ABC; compute unit costs; classify activities as value- or non-value-added.

Instructions
(a) Under traditional product costing, compute the total unit cost of each product. Prepare a simple comparative schedule of the individual costs by product (similar to Illustration 4-4).

(b) Under ABC, prepare a schedule showing the computations of the activity-based overhead rates (per cost driver).

(c) Prepare a schedule assigning each activity's overhead cost pool to each product based on the use of cost drivers. (Include a computation of overhead cost per unit, rounding to the nearest cent.)

(d) Compute the total cost per unit for each product under ABC.

(e) Classify each of the activities as a value-added activity or a non-value-added activity.

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Solution Summary

This job assesses as value-added activity or a non-value-added activity.

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See Also This Related BrainMass Solution

Classify Value or non-value added activities: Anna Bellatore; Dewey and Cheatam

A. Anna Bellatore, Inc. is interested in using its activity based costing system to improve its operating efficiency and its profit margins by applying activity-based management techniques. As part of this undertaking, you have been asked to classify its Mesa plant activities as value added or non-value added.

1. Designing new models
2. Purchasing raw materials and parts
3. Storing and managing inventory
4. Receiving and inspecting raw materials and parts
5. Interviewing and hiring new personnel
6. Machine forming sheet steel into appliance parts
7. Manually assembling parts into appliances
8. Training all employees of the company
9. Insuring all tangible fixed assets
10. Supervising production
11. Maintaining and repairing machinery and equipment
12. Painting and packaging finished appliances

B. Dewey and Cheatam is a law firm that is initiating an activity-based costing system. Jim Dewey, the senior partner and strong supporter of ABC, has prepared the following list of activities performed by a typical attorney in a day at a firm.

Activities Hours
1. Writing contracts and letters 1.0
2. Attending staff meetings 0.5
3. Taking depositions 1.0
4. Doing research 1.0
5. Travel to and from court 1.0
6. Eating lunch 1.0
7. Contemplating legal strategy 1.0
8. Litigating a case in court 2.5
9. Entertaining a prospective client 2.0

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