Question
Wallace Pharmaceuticals manufacturers an over-the-counter allergy medication. The company sells both large commercial containers of 1,000 capsules to health care facilities and travel packs of
Wallace
Pharmaceuticals manufacturers an over-the-counter allergy medication. The company sells both 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. The following information has been developed to determine if an activity-based costing system would be beneficial:
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.Requirement 1.
Wallace's
original single plantwide overhead allocation rate costing system allocated indirect costs to products at
$154.88
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. Round to two decimal places.
Select the formula, and then enter the amounts to compute the indirect cost per unit for each product. (Abbreviation used: mfg. = manufacturing. Round dollar amounts to two decimal places.)
= | Indirect cost per unit |
Commercial containers | = |
Travel packs | = |
Requirement 2. Compute the predetermined overhead allocation rate for each activity.
Begin by selecting the formula to calculate the predetermined overhead (OH) allocation rate. Then enter the amounts to compute the allocation rate for each activity. (Abbreviation used: qty = quantity. Round your answers to the nearest whole dollar.)
Predetermined OH | |||||||
= | allocation rate |
Materials handling | = |
Packaging | = |
Quality assurance | = |
Requirement 3. Use the predetermined overhead allocation rates to compute the activity-based costs per unit of the commercial containers and the travel packs. Round to two decimal places.
(Hint:
First compute the total activity-based costs allocated to each product line, and then compute the cost per unit.)
Begin by selecting the formula to allocate overhead (OH) costs.
= | Allocated mfg. overhead costs |
Compute the total activity-based costs allocated to commercial containers, and then compute the cost per unit for commercial containers. Finally, compute the total activity-based costs allocated to travel packs then compute the cost per unit for travel packs. (Round the cost per unit to two decimal places.)
Commercial containers | |
Materials handling | |
Packaging | |
Quality assurance | |
Total activity-based costs | |
Number of units | |
Activity-based cost per unit |
Travel packs |
Requirement 4. Compare the indirect activity-based costs per unit to the indirect costs per unit from the traditional system. How have the unit costs changed? Explain why the costs changed.
Relative to activity-based costing (ABC), the traditional system
over-costs
under-costs
the commercial containers and
over-costs
under-costs
the travel packs. The traditional system allocates overhead costs solely on
kilos handled.
machine hours.
samples tested.
Activity-based costing (ABC) recognizes that although commercial containers require
fewer
more
machine hours per unit than travel packs, they
do not require
require
the same proportion of material handling and quality assurance.
Activity | Estimated Indirect Costs | Allocation Base | Estimated Quantity of Allocation Base |
---|---|---|---|
Materials handling | $98,000 | Number of kilos | 24,500 kilos |
Packaging | 209,000 | Number of machine hours | 2,786 hours |
Quality assurance | 124,500 | Number of samples | 2,075 samples |
Total indirect costs | $431,500 |
|
|
Actual production information includes the following:
| Commercial Containers | Travel Packs |
---|---|---|
Units produced | 2,400 containers | 56,000 packs |
Weight in kilos | 12,000 | 5,600 |
Machine hours | 1,800 | 560 |
Number of samples | 480 | 840 |
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