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Problem 5-45 Volume-Based Costing versus ABC [LO 5-1, 5-3, 5-5] [The following information applies to the questions displayed below.] ADA Pharmaceutical Company produces three drugsDiomycin,

Problem 5-45 Volume-Based Costing versus ABC [LO 5-1, 5-3, 5-5]

[The following information applies to the questions displayed below.]

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 hourbased 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 firms current costing and activity-based costing systems.

ADA has the following budget information for the year:

Diomycin Homycin Addolin
Cost of direct materials $ 210,000 $ 270,000 $ 263,000
Cost of direct labor 255,000 239,000 268,000
Number of direct labor hours 7,250 6,850 2,050
Number of capsules 1,050,000 505,000 305,000

ADA has identified the following activities and cost drivers and has assigned them a total overhead cost of $202,500.

Activity Cost Driver Budgeted Overhead Cost Budgeted Cost Driver Volume
Machine setup Setup hours $ 16,500 1,650
Plant management Number of Workers 36,500 1,250
Supervision of direct labor Direct labor hours 46,500 16,500
Quality inspection Inspection hours 50,900 1,075
Order expediting Customers served 52,100 670
Total overhead $ 202,500

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:

Diomycin Homycin Addolin
Setup hours 225 625 825
Number of workers 225 425 625
Direct labor hours 7,250 6,850 2,050
Inspection hours 175 225 725
Customers served 50 105 525

Use the activity-based cost system to calculate the unit cost of each product. (Round intermediate calculations to 2 decimal places. Round "Cost per capsule" to 2 decimal places.)

Diomycin Homycin Addolin
Direct Materials $210,000.00 $270,000.00 $263,000.00
Direct Labor $255,000.00 $239,000.00 $268,000.00
Overhead
Total Cost $465,000.00 $509,000.00 $531,000.00
Packets produced $1,050,000.00 $505,000.00 $305,000.00
Cost per capsule

Part 1

Required:

1. Use the firms 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.

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