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. $201,000 $261,000 $254,000

Cost of direct labor 246,000 230,000 259,000

Number of direct labor hours 7,160 6,760 1,960

Number of capsules 960,000 496,000 296,000

ADA has identified the following activities and cost drivers and has assigned them a total overhead cost of $198,000.

Activity. Cost Driver Budgeted Overhead CostBudgeted Cost Driver Volume

Machine setup Setup hours $15,600 1,560

Plant management Number of Workers 35,600 1,160

Supervision of direct labor Direct labor hours 45,600 1 5,600

Quality inspection. Inspection hours 50,000 1,030

Order expediting Customers served 51,200 625

Total overhead $198,000

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 180 580 780

Number of workers 180 380 580

Direct labor hours 7,160 6,760 1,960

Inspection hours 130 180 680

Customers served 41 96 480

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.