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:

DiomycinHomycinAddolinCost of direct materials$196,000$256,000$249,000Cost of direct labor241,000225,000254,000Number of direct labor hours7,1106,7101,910Number of capsules910,000491,000291,000

ADA has identified the following activities and cost drivers and has assigned them a total overhead cost of $195,500.

ActivityCost DriverBudgeted Overhead CostBudgeted Cost Driver VolumeMachine setupSetup hours$15,1001,510Plant managementNumber of Workers35,1001,110Supervision of direct laborDirect labor hours45,10015,100Quality inspectionInspection hours49,5001,005Order expeditingCustomers served50,700600Total overhead$195,500

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:

DiomycinHomycinAddolinSetup hours155555755Number of workers155355555Direct labor hours7,1106,7101,910Inspection hours105155655Customers served3691455

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.