Gibson Pharmaceuticals manufacturers an over-the-counter allergy medication. The company sells both 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. The following information has been developed to determine if an activity-based costing system would be beneficial:

Data table

Activity	Estimated Indirect Costs	Allocation Base	Estimated Quantity of Allocation Base
Materials handling	$95,000	Number of kilos	19,000 kilos
Packaging	200,000	Number of machine hours	5,000 hours
Quality assurance	112,500	Number of samples	1,875 samples
Total indirect costs	$407,500

Actual production information includes the following:

	Commercial Containers	Travel Packs
Units produced	2,800 containers	50,000 packs
Weight in kilos	8,400	5,000
Machine hours	2,100	500
Number of samples	560	750

Data table

Activity	Estimated Indirect Costs	Allocation Base	Estimated Quantity of Allocation Base
Materials handling	$95,000	Number of kilos	19,000 kilos
Packaging	200,000	Number of machine hours	5,000 hours
Quality assurance	112,500	Number of samples	1,875 samples
Total indirect costs	$407,500

Actual production information includes the following:

	Commercial Containers	Travel Packs
Units produced	2,800 containers	50,000 packs
Weight in kilos	8,400	5,000
Machine hours	2,100	500
Number of samples	560	750

Question content area bottom

Part 1

Requirement 1.

Gibson's original single plantwide overhead allocation rate costing system allocated indirect costs to products at $81.50 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. Round to two decimal places.

Select the formula, and then enter the amounts to compute the indirect cost per unit for each product. (Abbreviation used: mfg. = manufacturing. Round dollar amounts to two decimal places.)

Allocated mfg. OH cost

Number of units

=

Indirect cost per unit

Part 2

Commercial containers

171150

2800

=

Part 3

Travel packs

40750

50000

=

Part 4

Requirement 2. Compute the predetermined overhead allocation rate for each activity.

Begin by selecting the formula to calculate the predetermined overhead (OH) allocation rate. Then enter the amounts to compute the allocation rate for each activity. (Abbreviation used: qty = quantity. Round your answers to the nearest whole dollar.)

Predetermined OH

=

allocation rate

Part 5

Materials handling

=

Part 6

Packaging

=

Part 7

Quality assurance

=

Part 8

Requirement 3. Use the predetermined overhead allocation rates to compute the activity-based costs per unit of the commercial containers and the travel packs. Round to two decimal places.

(Hint: First compute the total activity-based costs allocated to each product line, and then compute the cost per unit.)

Begin by selecting the formula to allocate overhead (OH) costs.

=

Allocated mfg. overhead costs

Part 9

Compute the total activity-based costs allocated to commercial containers, and then compute the cost per unit for commercial containers. Finally, compute the total activity-based costs allocated to travel packs then compute the cost per unit for travel packs. (Round the cost per unit to two decimal places.)

	Commercial containers
Materials handling
Packaging
Quality assurance
Total activity-based costs
Number of units
Activity-based cost per unit

Travel packs

Part 10

Requirement 4. Compare the indirect activity-based costs per unit to the indirect costs per unit from the traditional system. How have the unit costs changed? Explain why the costs changed.

Relative to activity-based costing (ABC), the traditional system

over-costs

under-costs

the commercial containers and

over-costs

under-costs

the travel packs.

Part 11

The traditional system allocates overhead costs solely on

kilos handled.

machine hours.

samples tested.

Activity-based costing (ABC) recognizes that although commercial containers require

fewer

more

machine hours per unit than travel packs, they

do not require

require

the same proportion of material handling and quality assurance.