Pharmaceuticals manufactures an over-the-counter allergy medication called Breathe and is trying to win market share from Sudafed and Claritin.

Robert

Pharmaceuticals has developed several different Breathe products tailored to specific markets. For example, the company sells 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.

Robert

Pharmaceuticals' controller, Sandra Dean, has just returned from a conference on ABC. She asks Keith Yeung, supervisor of the Breathe product line, to help her develop an ABC system. Dean and Yeung identify the following activities, related costs, and cost allocation bases:

LOADING...

(Click the icon to view the information.)Requirements

LOADING...

Requirement 1. Compute the cost allocation rate for each activity.

Determine the formula and then compute the cost allocation rate for each activity. (Round your answers to the nearest whole dollar.)

					Activity
		/		=	overhead rate

Mat. handling

/

=

/ kg

Packaging

/

=

/ hour

QA

/

=

/ sample

Requirement 2. Use the activity-based cost allocation rates to compute the indirect cost of each unit of the commercial containers and the travel packs.

(Hint:

Compute the total activity costs allocated to each product line and then compute the cost per unit.) (Round the cost per unit to the nearest cent.)

	Commercial Container
Materials handling
Packaging
Quality assurance
Total indirect costs
/ Number of units
Indirect activity cost per unit

Travel Pack

Requirement 3.

Robert

Pharmaceuticals's original single-allocation-based cost system allocated indirect costs to products at

$400

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.

							Indirect cost
Product			x			=	allocated
Commercial			x			=
Travel			x			=

Now compute the indirect cost per unit for each product under the original single-allocation-base system. (Round the cost per unit to the nearest cent.)

	Commercial Container
Total indirect costs allocated
/ Number of units
Indirect cost per unit

Travel Pack

Requirement 4. Compare the activity-based costs per unit to the costs from the original system. How have the unit costs changed? Explain why the costs changed as they did.

The original system

undercosted

overcosted

the commercial containers and

overcosted

undercosted

the travel packs.The original system allocated

3 times as much indirect costs to commercial containers as to travel packs.

3 times as much indirect cost to travel packs as to commercial containers.

the same amount of indirect cost to travel packs as to commercial containers.

However, commercial containers

did not use 3 times as much of the material handling and quality assurance resources.

used the same amount of indirect costs as the travel packs.

The ABC system

does not recognize that commercial containers do not require as much material handling and quality assurance as travel packs.

recognizes that commercial containers do not require 3 times as much material handling and quality assurance as travel packs.

recognizes that commercial containers require the same amount of material handling and quality assurance as travel packs.

So, relative to the original system, ABC allocates

less

more

of the material handling and quality assurance costs to commercial containers.