MOD Pharmaceutical Company produces three drugs-Diomycin, Homycin, and Addolin-belonging to the analgesic (pain killer) family of medication. Since its inception four years ago, MOD has used a direct labor hour-based system to assign manufacturing overhead costs to products. Eme Weissman, the president of MOD 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 MOD has the following budget information for the year Cost of direct materials Cost of direct labor Number of direct labor hours Tumber of capsules Diomycin 5 206.000 251,000 7,210 1,010,000 HoyeIn 5266,000 235,000 5.810 501,000 Addolin $259,000 264,000 2,010 2a1,000 MOD has identified the following activities and cost drivers and has assigned them a total overhead cost of $200,500, Budgeted Budgeted MOD has identified the following activities and cost drivers and has assigned them a total overhead cost of $200,500. Budgeted Overhead Activity Machine setup Plant management Supervision of direct labor Quality inspection Oder expediting Total head Cost Driver Setup hours Number of Workers Direct Labor hours Inspection hours Customer served $ 16,100 36,100 46,100 50, 500 51,700 5200, 500 Budgeted Cost Drive Volu 1,610 1.210 16,100 1,055 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 products 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 the same for all similar products Help Save & Ex proQuct is proportional to the direct lapor nours 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 MOD is a good measure of expediting production orders Takedo gathered the following information about the cost driver volume for each product Domych Homycin 605 dolin BOS 205 Setup hours Tube of workers Direct Labor hours Inspection hours Customer served 205 101 2,010 705 500 3 MOD Pharmaceutical would achieve different results by using either its current costing or ABC costing a) Compare and analyze the cost differences for the two cost systems used by MOD Hint you may start your analyse by comparing Overhead applied for each product under the current costing and the ABC costing) 305 Setup hours Number of workers Direct labor hours Inspection hours Customers served 205 205 7,210 605 LOS 6,810 2es 101 155 2,010 785 505 16 3. MOD Pharmaceutical would achieve different results by using ether its current costing or ABC costing a) Compare and analyze the cost differences for the two cost systems used by MOD. (Hint: you may start your analysis by comparing overhead applied for each product under the current costing and the ABC costing) b) in your own words, discuss why might the differences outlined in partza) be strategically important to MOD Pharmaceutica? c) In your own words explain how ABC adds to MOD's competitive advantage? MOD Pharmaceutical Company produces three drugs-Diomycin, Homycin, and Addolin-belonging to the analgesic (pain killer) family of medication. Since its inception four years ago, MOD has used a direct labor hour-based system to assign manufacturing overhead costs to products. Eme Weissman, the president of MOD 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 MOD has the following budget information for the year Cost of direct materials Cost of direct labor Number of direct labor hours Tumber of capsules Diomycin 5 206.000 251,000 7,210 1,010,000 HoyeIn 5266,000 235,000 5.810 501,000 Addolin $259,000 264,000 2,010 2a1,000 MOD has identified the following activities and cost drivers and has assigned them a total overhead cost of $200,500, Budgeted Budgeted MOD has identified the following activities and cost drivers and has assigned them a total overhead cost of $200,500. Budgeted Overhead Activity Machine setup Plant management Supervision of direct labor Quality inspection Oder expediting Total head Cost Driver Setup hours Number of Workers Direct Labor hours Inspection hours Customer served $ 16,100 36,100 46,100 50, 500 51,700 5200, 500 Budgeted Cost Drive Volu 1,610 1.210 16,100 1,055 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 products 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 the same for all similar products Help Save & Ex proQuct is proportional to the direct lapor nours 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 MOD is a good measure of expediting production orders Takedo gathered the following information about the cost driver volume for each product Domych Homycin 605 dolin BOS 205 Setup hours Tube of workers Direct Labor hours Inspection hours Customer served 205 101 2,010 705 500 3 MOD Pharmaceutical would achieve different results by using either its current costing or ABC costing a) Compare and analyze the cost differences for the two cost systems used by MOD Hint you may start your analyse by comparing Overhead applied for each product under the current costing and the ABC costing) 305 Setup hours Number of workers Direct labor hours Inspection hours Customers served 205 205 7,210 605 LOS 6,810 2es 101 155 2,010 785 505 16 3. MOD Pharmaceutical would achieve different results by using ether its current costing or ABC costing a) Compare and analyze the cost differences for the two cost systems used by MOD. (Hint: you may start your analysis by comparing overhead applied for each product under the current costing and the ABC costing) b) in your own words, discuss why might the differences outlined in partza) be strategically important to MOD Pharmaceutica? c) In your own words explain how ABC adds to MOD's competitive advantage