Question
Required information Problem 5-45 Volume-Based Costing versus ABC [LO 5-1, 5-3, 5-5] Skip to question [The following information applies to the questions displayed below.] ADA
Required information
Problem 5-45 Volume-Based Costing versus ABC [LO 5-1, 5-3, 5-5]
Skip to question
[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 | $ | 199,000 | $ | 259,000 | $ | 252,000 | |||||
| Cost of direct labor | 244,000 | 228,000 | 257,000 | ||||||||
| Number of direct labor hours | 7,140 | 6,740 | 1,940 | ||||||||
| Number of capsules | 940,000 | 494,000 | 294,000 | ||||||||
ADA has identified the following activities and cost drivers and has assigned them a total overhead cost of $197,000.
| Activity | Cost Driver | Budgeted Overhead Cost | Budgeted Cost Driver Volume | |||||
| Machine setup | Setup hours | $ | 15,400 | 1,540 | ||||
| Plant management | Number of Workers | 35,400 | 1,140 | |||||
| Supervision of direct labor | Direct labor hours | 45,400 | 15,400 | |||||
| Quality inspection | Inspection hours | 49,800 | 1,020 | |||||
| Order expediting | Customers served | 51,000 | 615 | |||||
| Total overhead | $ | 197,000 | ||||||
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 | 170 | 570 | 770 | ||||||||
| Number of workers | 170 | 370 | 570 | ||||||||
| Direct labor hours | 7,140 | 6,740 | 1,940 | ||||||||
| Inspection hours | 120 | 170 | 670 | ||||||||
| Customers served | 39 | 94 | 470 | ||||||||
rev: 09_27_2018_QC_CS-140513
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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Income Tax Fundamentals 2013
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
31st Edition
1111972516, 978-1285586618, 1285586611, 978-1285613109, 978-1111972516
