ADA Pharmaceutical Company produces three drugsDiomycin, Homycin, and Addolinbelonging to the analgesic (pain-killer) family of medication. Since its inception four years ago, ADA has used a direct labor hour-based system to assign manufacturing overhead costs to products.

Eme Weissman, the president of ADA Pharmaceutical, has just read about activity-based costing in a trade journal. With some curiosity and interest, she asked her financial controller, Takedo Simon, to examine differences in product costs between the firm's current costing and activity-based costing systems.

ADA has the following budget information for the year:

Diomycin Homycin Addolin

Cost of direct materials $207,000 $267,000 $260,000

Cost of direct labor 252,000 236,000 265,000

Number of direct labor hours 7,220 6,820 2,020

Number of capsules 1,020,000 502,000 302,000

ADA has identified the following activities and cost drivers and has assigned them a total overhead cost of $201,000.

Activity Cost Driver Budgeted Overhead Cost Budgeted Cost Driver Volume

Machine setup. Setup hours $16,200 1,620

Plant management Number of Workers 36,200 1,220

Supervision of direct labor Direct labor hours 46,200 16,200

Quality inspection Inspection hours 50,600 1,060

Order expediting Customers served 51,800 655

Total overhead $201,000

Takedo selected the cost drivers with the following justifications:

SETUP HOURS:The cost driver of setup hours is used because the same product takes about the same amount of setup time regardless of size of batch. For different products, however, the setup time varies.

NUMBER OF WORKERS:Plant management includes plant maintenance and corresponding managerial duties that make production possible. This activity depends on the number of workers. The more workers involved, the higher the cost.

DIRECT LABOR HOURS:Supervisors spend their time supervising production. The amount of time they spend on each product is proportional to the direct labor hours worked.

INSPECTION HOURS:Inspection involves testing a number of units in a batch. The time varies for different products but is the same for all similar products.

NUMBER OF CUSTOMERS SERVED:The need to expedite production increases as the number of customers served by the company increases. Thus, the number of customers served by ADA is a good measure of expediting production orders.

Takedo gathered the following information about the cost driver volume for each product:

Diomycin Homycin Addolin

Setup hours 210 610 810

Number of workers 210 410 610

Direct labor hours 7,220 6,820 2,020

Inspection hours 160 210 710

Customers served 47 102 510

Part 1

Required:

1.Use the firm's current costing system to calculate the unit cost of each product.

2. Use the activity-based cost system to calculate the unit cost of each product.