Comprehensive ABC implementation (Learning Objectives 2, 3)

HCI Pharmaceuticals manufactures an over-the-counter allergy medication called Breathe. HCI Pharmaceuticals is trying to win market share from Sudafed and Tylenol. HCI Pharmaceuticals has developed several different Breathe products tai¬ lored to specific markets. For example, the company sells large commercial containers of 1,000 capsules to health care facilities and travel packs of 20 capsules to shops in airports, train stations, and hotels.

HCI Pharmaceuticals’ controller, Sandra Dean, has just returned from a confer¬ ence on ABC. She asks Keith Yeung, supervisor of the Breathe product line, to help her develop an ABC system. Dean and Yeung identify the following activities, related costs, and cost allocation bases:

The commercial-container Breathe product line had a total weight of 8,000 kilos, used 1,200 machine hours, and required 200 samples. The travel-pack line had a total weight of 6,000 kilos, used 400 machine hours, and required 300 samples. HCI pro¬ duced 2,500 commercial containers of Breathe and 50,000 travel packs.
Requirements 1. Compute the cost allocation rate for each activity.
2. Use the activity-based cost allocation rates to compute the indirect cost of each unit of the commercial containers and the travel packs. (Hint: Compute the total activity costs allocated to each product line and then compute the cost per unit.)
3. HCI Pharmaceuticals’ original single-allocation-based cost system allocated indirect costs to products at $300 per machine hour. Compute the total indirect costs allocated to the commercial containers and to the travel packs under the original system. Then, compute the indirect cost per unit for each product.
4. Compare the activity-based costs per unit to the costs from the original system. How have the unit costs changed? Explain why the costs changed as they did.
5. What clues indicate that HCI Pharmaceuticals’ ABC system is likely to pass the cost-benefit test?

Transcribed Image Text:

Estimated Indirect Activity Activity Costs Materials handling. $190,000 Allocation Base Kilos.............. Estimated Quantity of Allocation Base 19,000 kilos Packaging.... 400,000 Machine hours........... 2,000 hours Quality assurance...... 112,500 Samples....... 1,875 samples Total indirect costs....... $702,500