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Chapter 19: 33PGA_4 (page 1076)

Willitte Pharmaceuticals manufactures 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:

Activity Estimated Estimated Quantity

Indirect Cost Allocation Base of Allocation Base

Materials handling \( 95,000 Number of kilos 19,000 kilos

Packaging 200,000 Number of machine hours 5,000 hours

Quality assurance 112,500 Number of samples 1,875 samples

Total indirect costs \) 407,500

Actual production information includes the following:

Commercial Containers Travel Packs

Units produced 2,400 containers 50,000 packs

Weight in kilos 9,600 5,000

Machine hours 1,680 500

Number of samples 240 750

Requirements

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.

Short Answer

Expert verified

Answer

The traditional method allocated costs on a uniform basis but the activity method allocates them based on the activity and predetermined rate for them. So, there would be a difference in unit cost between the two methods.

Step by step solution

01

Comparison of indirect cost per unit by activity-based method and traditional method

Indirect cost per unit

By Traditional Method

By Activity-based method

Commercial containers

$57.05

$54

Travel Packs

$0.815

$1.8

By comparing the figures, it can be noticed that the indirect cost per unit is highest under activity-based costing.

02

Why unit cost changed under both methods

There is a difference between the unit cost under both methods. The reason is that under the traditional method the cost is allocated based on a uniform allocation basis. So, this system may not allocate costs fairly and some products or processes may be charged with higher costs.

But under the activity-based method, first of all, indirect costs are segregated into different activities, and then diffract activities鈥� costs are allocated based on some allocation base. In this, each product or process is charged with a fair amount of cost and there is less chance of having a larger disparity among product costs.

This is the reason for the unit cost change under both methods.

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Most popular questions from this chapter

Koehler makes handheld calculators in two models: basic and professional. Koehler estimated $721,000 of manufacturing overhead and 515,000 machine hours for the year. The basic model actually consumed 230,000 machine hours, and the professional model consumed 285,000 machine hours.

Compute the predetermined overhead allocation rate using machine hours (MHr) as the allocation base. How much overhead is allocated to the basic model? To the professional model?

List and define the four types of quality costs.

Explain the difference between the target price and target cost.

Stegall, Inc. manufactures motor scooters. For each of the following examples of quality costs, indicate which of the following quality cost categories each example represents: prevention costs, appraisal costs, internal failure costs, or external failure costs.

1. Preventive maintenance on machinery

2. Direct materials, direct labor, and manufacturing overhead incurred to rework a defective scooter that is detected in-house through inspection

3. Lost profits from lost sales if the company鈥檚 reputation is hurt because customers previously purchased a poor-quality scooter

4. Cost of inspecting raw materials, such as chassis and wheels

5. Working with suppliers to achieve on-time delivery of defect-free raw materials

6. Cost of warranty repairs on a scooter that malfunctions at a customer鈥檚 location

7. Costs of testing durability of vinyl

8. Cost to reinspect reworked scooters

Anu Ghai was a new production analyst at RHI, Inc., a large furniture factory in North Carolina. One of her first jobs was to update the predetermined overhead allocation rates for factory production costs. This was normally done once a year, by analysing the previous year鈥檚 actual data, factoring in projected changes, and calculating a new rate for the coming year. What Anu found was strange. The activity rate for 鈥渕aintenance鈥� had more than doubled in one year, and she was puzzled how that could have happened. When she spoke with Larry McAfee, the factory manager, she was told to spread the increases out over the other activity costs to 鈥渟mooth out鈥� the trends. She was a bit intimidated by Larry, an imposing and aggressive man, but she knew something wasn鈥檛 quite right. Then one night she was at a restaurant and overheard a few employees who worked at RHI talking. They were joking about the work they had done fixing up Larry鈥檚 home at the lake last year. Suddenly everything made sense. Larry had been using factory labor, tools, and supplies to have his lake house renovated on the weekends. Anu had a distinct feeling that if she went up against Larry on this issue, she would come out the loser. She decided to look for work elsewhere.

Requirements

1. Besides spotting irregularities, like the case above, what are some other ways that ABC cost data are useful for manufacturing companies?

2. What are some of the other options that Anu might have considered?
See all solutions

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