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ACCT520 - Fall 2013 Chapter 11 - Homework Assignment Name: ________________________ ADA Pharmaceutical Company produces three drugs: Diomycin, Homycin and Addolin belonging 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. Irene Weissman, the president of ADA enterprises has just read about activity-based costing in a trade journal. With some curiosity and interest, she asked JP, the financial controller 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: Activity Cost of direct materials Cost of direct labor Number of direct labor hours Number of capsules Diomycin $ 205,000 $ 250,000 7,200 1,000,000 Homycin $ 265,000 $ 234,000 6,800 500,000 Addolin $ 258,000 $ 263,000 2,000 300,000 ADA has identified the following activities as cost drivers and has allocated them to total overhead cost of $200,000 as follows: Activity Machine setup Plant management Supervision of direct labor Quality inspection Expediting orders Cost Driver Setup hours Workers Direct labor hours Budgeted Overhead Cost $ 16,000 $ 36,000 $ 46,000 Cost Driver Volume 1,600 1,200 1,150 Inspection hours Customers served $ 50,400 $ 51,600 1,050 645 JP 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. SUPERVISION OF DIRECT LABOR: Supervisors spend their time supervising production. The amount of time they spend on each product is proportional to the direct labor hours worked. QUALITY INSPECTION: 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. Page 1 ACCT520 - Fall 2013 Chapter 11 - Homework Assignment Name: ________________________ JP gathered the following information about the cost driver volume for each product: Machine setups Plant management Supervision of direct labor Quality inspection Expediting production orders Diomycin 200 200 200 150 45 Homycin 600 400 300 200 100 Addolin 800 600 650 700 500 Required: Complete each of the following questions. For problems: show your work, provide labels and descriptions of amounts, be organized in your work and clearly show your solution to the question. When asked to \"Explain\" your answer should be a minimum of 50 words supported by course content information and details for full credit. 1. Use the firm's current costing system to calculate the total cost per unit of each product. 2. Use the activity-based cost system to calculate the total cost per unit of each product. 3. Provide a comparison of the total unit cost by product for each method. Show if under/over-costed and likely under/over-pricing impacts as a result. 4. The two cost systems provide different results; give/explain several reasons for this. Explain why might these differences be strategically important to ADA Enterprises? 5. Explain how using ABC might add to ADA's competitive advantage? Page 2