FireOut, Inc. Cost Accounting: Product Costing and Decision Making

This assignment solution analyzes the cost accounting practices of FireOut, Inc., a manufacturer of fire extinguishers. The solution begins by calculating product costs using traditional costing methods, followed by an activity-based costing (ABC) analysis, including the determination of overhead rates and cost assignments. The assignment then explores break-even analysis, the impact of sales mix changes, and the preparation of CVP income statements for different product lines. Decision-making scenarios are addressed through incremental analysis, including make-or-buy decisions and the evaluation of new equipment purchases. Furthermore, the solution includes a variable-costing income statement and a job-order costing analysis, providing a complete overview of the company's financial performance and cost management strategies.

Problem 5-35A
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-litre cylinder that holds 2.50 kilograms of multi-purpose dry chemical at 480 PSI
(pounds per square inch). The commercial model is a low-volume (10,200 units), two-litre cylinder
that holds 10 kilograms of multi-purpose dry chemical at 390 PSI. Both products require 1.50 hours
of direct labour for completion. Therefore, total annual direct labour hours are 96,300 or [1.50 hrs.
× (54,000 + 10,200)]. Expected annual manufacturing overhead is $1,502,280. Thus, the
predetermined overhead rate is $15.60 or ($1,502,280 ÷ 96,300) per direct labour hour. The direct
materials cost per unit is $18.64 for the home model and $26.66 for the commercial model. The
direct labour cost is $20.20 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 Kilograms $70,450 337,000 216,000 121,000
Forming Machine hours 151,000 35,200 27,000 8,200
Assembling Number of parts 390,800 219,000 167,000 52,000
Testing Number of tests 51,100 26,000 16,000 10,000
Painting Litres 54,310 6,260 4,260 2,000
Packing and
shipping Kilograms 784,620 337,000 216,000 121,000
$1,502,280
Under traditional product costing, calculate the total unit cost of each product. Prepare a simple
comparative schedule of the individual costs by product. (Round answers to 2 decimal places,
e.g. 15.25.)
Products
Manufacturing
Costs
Home
Model
Commercial
Model
Direct materials
$ $
Direct labour
Overhead
Total unit cost
$ $
Under ABC, prepare a schedule showing the calculations of the activity-based overhead rates (per
cost driver). (Round rate per cost driver to 2 decimal places, e.g. 15.25 and other
answers to 0 decimal places e.g. 1525.)
Cost Pool
Est.
MOH
Est.
Usage Rate
Cost
Drivers
Receiving $ $ per kilogram
18.64 26.66
20.20 20.20
23.4 23.4
62.24 70.26
337000

Forming
$ $
per machine hr
Assembly
$ $
per part
Testing
$ $
per test
Painting
$ $
per litre
Packing &
shipping
$ $
per kilogram
$
Prepare a schedule assigning each activity’s overhead cost pool to each product based on the use
of cost drivers. (Round per unit cost to 2 decimal places, e.g. 15.25 and other answers to
0 decimal places e.g. 1525.)
Activity-based overhead
applied Home Commercial
Receiving-kilograms
$ $
Forming—machine hours
Assembly—number of parts
Testing—number of tests
Painting—litres
Packing and shipping-kilograms
Total overhead applied $ $
70450 337000 0.21
151000 35200 4.29
390800 219000 1.78
51100 26000 1.97
54310 6260 8.68
784620 337000 2.33
1502280
45154.90 25295.10
115823.86 35176.14
298007.31 92792.69
31446.15 19653.85
36958.56 17351.44
502901.84 281718.16

Total units produced
Per unit overhead cost
$ $
Calculate the total cost per unit for each product under ABC. (Round answers to 2 decimal
places, e.g. 15.25.)
Home Commercial
Per unit cost
$ $
Classify each of the activities as a value-added activity or a non–value-added activity.
Receiving
Forming
Assembling
Testing
Painting
Packing and
shipping
2)
Current Designs manufactures two different types of kayaks, rotomoulded kayaks and composite
kayaks. The following information is available for each product line.
1030292.62 471987.38
54000 10200
19.08 46.27
57.92 93.13
Value-added
Value-added
Value-added
Value-added
Value-added
Value-added

Rotomoulde
d
Composit
e
Sales price/unit $1,010 $2,120
Variable costs/unit $600 $1,420
The company’s fixed costs are $869,000. An analysis of the sales mix identifies that rotomoulded
kayaks make up 80% of the total units sold.
Determine the weighted-average unit contribution margin for Current Designs.
Weighted-average unit contribution margin
$
Determine the break-even point in units for Current Designs and identify how many units of each
type of kayak will be sold at the break-even point. (Round answers to 0 decimal places, e.g.
5,275.)
Break-even Sales units
Rotomolded
Kayaks
Composite
Kayaks
Break-even Sales Distribution units units
Assume that the sales mix changes, and rotomoulded kayaks now make up 70% of total units sold.
Calculate the total number of units that would need to be sold to earn a net income of $2.12
million and identify how many units of each type of kayak will be sold at this level of
income. (Round answers to 0 decimal places, e.g. 5,275.)
Required
Sales
unit
s
Rotomolded
Kayaks
Composite
Kayaks
Break-even Sales Distribution units units
Assume that Current Designs will have sales of $3.30 million with two-thirds of the sales dollars in
rotomoulded kayaks and one third of the sales dollars in composite kayaks. Assuming $700,000 of
fixed costs are allocated to the rotomoulded kayaks and $170,000 to the composite kayaks,
prepare a CVP income statement for each product line. (Round answers to 0 decimal places,
468
1857
1486 371
6014
4210 1804

e.g. 5,275.)
Rotomolded
Kayaks
Composite
Kayaks
$ $
$ $
Calculate the degree of operating leverage for each product line. (Round answers to 2 decimal
places, e.g. 52.75.)
Rotomolded
Kayaks
Composite
Kayaks
Degree of operating
leverage
3.)
Decision Making 6-1 (Part Level Submission)
Current Designs manufactures two different types of kayaks, rotomoulded kayaks and composite
kayaks. The following information is available for each product line.
Rotomoulde
d
Composit
e
Sales price/unit $840 $1,760
Variable costs/unit $500 $1,180
The company’s fixed costs are $722,000. An analysis of the sales mix identifies that rotomoulded
kayaks make up 80% of the total units sold.
(a)
Sales 2200000 1100000
Variable Costs 1306931 736792
Contribution Margin 893069 363208
Fixed Costs 700000 170000
Net Income / (Loss) 193069 193208
4.63 1.88

Your answer is correct.
Determine the weighted-average unit contribution margin for Current Designs.
Weighted-average unit contribution margin
$
(b)
Determine the break-even point in units for Current Designs and identify how many units of each
type of kayak will be sold at the break-even point. (Round answers to 0 decimal places, e.g.
5,275.)
Break-even Sales units
Rotomolded
Kayaks
Composite
Kayaks
Break-even Sales Distribution units units
4.)
Problem 7-43A (Part Level Submission)
The Kamloops Outdoors Corporation, which produces a highly successful line of summer lotions and
insect repellents and sells them to wholesalers, has decided to diversify in order to stabilize its sales
throughout the year. A natural area for the company to consider is the production of winter lotions
and creams to prevent dry and chapped skin.
After considerable research, the company has developed a winter products line. However, because
of the conservative nature of company management, the president has decided to introduce only
one of the new products for this coming winter. If the product is a success, there will be further
expansion in future years.
The product selected is a lip balm to be sold in a lipstick-type tube. The company will sell the
388
1861
1489 372

product to wholesalers in boxes of 24 tubes for $18.00 per box. Because of available capacity, the
company will incur no additional fixed charges to produce the product. However, to allocate a fair
share of the company’s present fixed costs to the new product, the product will absorb a $145,000
fixed charge.
Using the estimated sales and production of 100,000 boxes of lip balm as the standard volume, the
accounting department has developed the following costs per box of 24 tubes:
Direct labour $4.10
Direct
materials 6.00
Total overhead 2.95
Total $13.05
Kamloops Outdoors has approached a cosmetics manufacturer to discuss the possibility of
purchasing the tubes for the new product. The purchase price of the empty tubes from the
cosmetics manufacturer would be $2.00 per 24 tubes. If Kamloops Outdoors accepts the purchase
proposal, it is estimated that direct labour and variable overhead costs would be reduced by 10%
and direct materials costs would be reduced by 20%.
(a)
Should Kamloops Outdoors make or buy the tubes? (Round answers to 2 decimal places, e.g.
15.25. If an amount reduces the net income then enter with a negative sign preceding
the number e.g. -15,000 or parenthesis, e.g. (15,000).)
Make
(Per Box)
Buy
(Per Box)
Net Income
Increase (Decrease)
$ $ $
Direct material
6 4.8 -1.2
Direct labour 4.10 3.69 -0.41
Variable overheads 2.95 2.66 -0.30
Purchase price 0 2
2

$ $ $
Kamloops should
the tubes.
5.)
Decision Making 7-1 (Part 2) (Part Level Submission)
Current Designs faces a number of important decisions that require incremental analysis.
Current Designs is always working to identify ways to increase efficiency while becoming more
environmentally conscious. During a recent brainstorming session, one employee suggested to
Diane Buswell, controller, that the company should consider replacing the current rotomould oven
as a way to realize savings from reduced energy consumption. The oven operates on natural gas,
using 15,000 therms of natural gas for an entire year. A new, energy-efficient rotomould oven would
operate on 13,200 therms of natural gas for an entire year. After seeking out price quotes from a
few suppliers, Diane determined that it would cost approximately $220,000 to purchase a new,
energy-efficient rotomould oven. She determines that the expected useful life of the new oven
would be 10 years, and it would have no salvage value at the end of its useful life. Current Designs
would be able to sell the current oven for $8,800.
(a)
Prepare an incremental analysis to determine if Current Designs should purchase the new
rotomould oven, assuming that the average price for natural gas over the next 10 years will be
$0.60 per therm. (If an amount reduces the net income then enter with a negative sign
preceding the number or parenthesis, e.g. -15,000, (15,000). Enter all other amounts as
positive and subtract where necessary.)
Retain Replace
Net Increase
(Decrease)
Regular operations $ $ $
Purchase price 0 2
Total cost
13.05 13.15 0.09
make
-9000 -7920

Cost of the new oven
Salvage of old oven
$ $ $
Current Designs
purchase the new rotomould oven.
6.)
Problem 8-35A (Part Level Submission)
The Daniels Tool & Die Corporation has been in existence for a little over three years. The
company’s sales have been increasing each year as it builds a reputation. The company
manufactures dies to its customers’ specifications and therefore uses a job-order cost system.
Factory overhead is applied to the jobs based on direct labour hours—the absorption-costing (full)
method. Overapplied or underapplied overhead is treated as an adjustment to Cost of Goods Sold.
The company’s income statements and other data for the last two years are as follows:
DANIELS TOOL & DIE CORPORATION
2015–2016 Comparative Income Statements
2015 2016
Sales $833,900 $1,015,100
Cost of goods sold
Finished goods, January 1 24,000 17,800
Cost of goods manufactured 544,600 654,400
Total available 568,600 672,200
Finished goods, December 31 17,800 13,300
Cost of goods sold before overhead adjustment 550,800 658,900
-9000 -7920 -1080
0 -220000 -220000
0 8800 8800
-9000 -219120 -210120
should not

Underapplied factory overhead 35,800 14,100
Cost of goods sold 586,600 673,000
Gross profit 247,300 342,100
Selling expenses 81,900 94,500
Administrative expenses 69,000 74,400
Total operating expenses 150,900 168,900
Operating income $96,400 $173,200
Daniels Tool & Die Corporation Inventory Balances
January 1, 2015 December 31,
2015
December 31,
2016
Raw material $21,700 $29,900 $10,400
Work in process $40,500 $47,700 $63,400
Direct labour hours (used in WIP) 1,350 1,630 2,280
Finished goods $24,000 $17,800 $13,300
Direct labour hours (used in FG) 1,470 1,010 840
Daniels used the same predetermined overhead rate in applying overhead to its production orders
in both 2015 and 2016. The rate was based on the following estimates:
Fixed factory overhead $24,790
Variable factory overhead $153,698
Direct labour hours (used in WIP) 24,790
Direct labour costs (used in FG) $148,740
In 2015 and 2016, the actual direct labour hours used were 20,200 and 23,800, respectively. Raw
materials put into production were $291,500 in 2015 and $370,600 in 2016. The actual fixed
overhead was $42,300 for 2015 and $23,240 for 2016, and the planned direct labour rate was the
direct labour achieved.
For both years, all of the administrative costs were fixed. The variable portion of the selling
expenses results from a 5% commission that is paid as a percentage of the sales revenue.

(a)
For the year ended December 31, 2016, prepare a revised income statement for Daniels Tool & Die
Corporation using the variable-costing method. (Round answers to 0 decimal places, e.g.
5,275.)
Daniels Tools & Die Corporation
Variable Costing Income Statement
For the year ended December 31, 2016
$
:
$
:
Sales
1015100
Less
Variable costs
Variable costs of goods manufactured
673038
Variable selling and administrative expenses 50755
Total variable costs 723793
Contribution margin 291307
Less
Fixed costs
Fixed manufacturing overhead 23240
Fixed selling and administrative expenses 118145
Total fixed costs 141385

$
7.)
Waterways Continuing Problem-8 (Part Level Submission)
When Waterways’ management met to review the year-end financial statements, the room was
filled with excitement. Sales had been exceptional during the year and every department had
exceeded the budget and last year’s sales totals. Several years ago Waterways had implemented a
bonus system based on percentage of sales over budget, and the managers were expecting healthy
cheques at the end of the year.
Yet the plant manager, Ryan Smith, was stunned into silence when he read the bottom line on the
income statement for manufacturing operations. It was showing a loss! He immediately approached
the CFO asking for an explanation. Ryan wondered, “Why did we go through all that trouble and
inconvenience to adopt those cost-cutting measures when they had the opposite effect?” One of
those measures was to move toward lean manufacturing.
The CFO retrieved the following information with respect to the top-selling line from the
manufacturing operations for the last three years. Production on this line began on January 1, 2014:
2014 2015 2016
Beginning inventory of finished units 0
Production in units 72,000 73,800 59,040
Sales in units 62,000 63,800 79,040
Selling price $29 $29 $31
Direct material $3 $3 $4
Direct labour 5 5 6
Variable manufacturing overhead 4 4 4
Variable selling and administration 5 5 5
Fixed manufacturing overhead 590,400 590,400 590,400
Fixed selling and administration 120,000 120,000 120,000
Waterways uses the absorption-costing method and accounts for inventory using FIFO.
Operating income
149922