Question

McNeil Pharmaceuticals manufactures an over-the-counter allergy medication called Breathe. McNeil is trying to win market share from Sudafed and Tylenol. The company 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. McNeil's controller, Summer Donaldson, has just returned from a conference on ABC. She asks Kalin Yung, supervisor of the Breathe product line, to help her develop an ABC system. Donaldson and Yung identify the following activities, related costs, and cost allocation bases: (Click the icon to view the information.) Read the requirements. Requirement 1. Determine the formula, then compute the cost allocation rate for each activity. (Round your answers to the nearest whole dollar. Abbreviations used: Mat.=Materials, QA=Quality assurance) Activity cost allocation rate

Answer 1

1	Computation of Allocation Rate:
	Activity	Costs	Base Usage	Allocation Rate
	Material Handling	1,30,000	13000	10.00
	Packaging	4,60,000	2300	200.00
	Quality Assurance	1,18,000	2000	59.00
	Total	7,08,000
		Activity Usage
2	Activity	Commercial	Travel	Total
	Material Handling	8,096	5976	14,072
	Packaging	1,800	600	2,400
	Quality Assurance	260	360	620
	Total
	Allocation of Cost basis Usage:
	Activity	Commercial	Travel
	Material Handling	80,960	59,760	(Activity uSage * Allocation Rate)
	Packaging	3,60,000	1,20,000
	Quality Assurance	15,340	21,240
	Total	4,56,300	2,01,000
	Units Produced	2,700	30,000
	Cost Per Unit	169.00	6.70
3		Commercial	Travel
	Usage of Machine Hour	1,800	600
	Allocation Rate	300	300
	Allocation Value	5,40,000	1,80,000
	Units Produced	2,700	30,000
	Cost Per Unit	200.00	6.00
4		Commercial	Travel
	Allocation in ABC Method	169.00	6.70
	Allocation in Traditional Method	200.00	6.00
	Allocation base have changed leading to cost change, ABC uses more precise allocation base by each activity detail