Question

Willitte Pharmaceuticals manufactures an over-the-counter allergy medication called Breathe. Willitte 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. Willitte's controller, Sylvia Dufferin, has just returned from a conference on ABC. She asks Kevin Yackee, supervisor of the Breathe product line, to help her develop an ABC system. Dufferin and Yackee 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 Data Table A Requirements Estimated Quantity of Allocation Base Estimated Indirect Allocation Activity Activity Costs Base Materials handling .......... $ 160,000 Kilos Packaging ............ 430,000 Machine hours Quality assurance ......... 705,000 Total indirect costs.......... 16,000 kilos 2,500 hours 115,000 Samples 1. Compute the cost allocation rate for each activity. 2. Use the activity-based cost allocation rates to compute the indirect cost of each unit of the commercial containers and the travel packs. (Hint: Compute the total activity costs allocated to each product line and then compute the cost per unit.) 3. The company's original single-allocation-based cost system allocated indirect costs to products at $450 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. 4. Compare the activity-based costs per unit to the costs from the original system. How have the unit costs changed? Explain why the costs changed as they did. 1,250 samples The commercial-container Breathe product line had a total weight of 8,729 kilos, used 900 machine hours, and required 230 samples. The travel-pack line had a total weight of 6,204 kilos, used 300 machine hours, and required 330 samples. Willitte produced 4,050 commercial containers of Breathe and 60,000 travel packs.

Answer 1

1	Activity cost allocation rate=Indirect cost for the activity/Quantity of allocation base
					Materials handling	Packaging	Quality assurance
	Estimated indirect costs			a	160000	430000	115000
	Quantity of allocation base			b	16000	2500	1250
	Predetermined overhead allocation rate			a/b	10	172	92
					Per kilo	Per hour	Per sample
2	Activity-based costs per unit:
					Commercial container
	Materials handling				87290
	(Weight in kilos*Activity cost allocation rate)				(8729*10)
	Packaging				154800
	(Machine hours*Activity cost allocation rate)				(900*172)
	Quality assurance				21160
	(No.of samples*Activity cost allocation rate)				(230*92)
	Total activity-based costs			a	263250
	Number of units			b	4050
	Activity-based cost per unit			a/b	65
					Travel packs
	Materials handling				62040
	(Weight in kilos*Predetermined OH allocation rate)				(6204*10)
	Packaging				51600
	(Machine hours*Predetermined OH allocation rate)				(300*172)
	Quality assurance				30360
	(No.of samples*Predetermined OH allocation rate)				(330*92)
	Total activity-based costs			a	144000
	Number of units			b	60000
	Activity-based cost per unit			a/b	2.4
3	Indirect costs allocated=Plant wide overhead allocation rate*Machine hours used
	Commercial containers:
	Indirect costs allocated=450*900=$ 405000
	Travel packs:
	Indirect costs allocated=450*300=$ 135000
	Indirect cost per unit=Indirect costs allocated/Units produced
					Commercial containers	Travel packs
	Indirect costs allocated			a	405000	135000
	Units produced			b	4050	60000
	Indirect cost per unit			a/b	100	2.25
4	Relative to activity-based costing (ABC),the traditional system over-costs the commercial containers and under-costs the travel packs
	The traditional system allocates overhead costs solely on machine hours.
	Activity-based costing (ABC) recognizes that although commercial containers require fewer more machine hours per unit than travel packs,they do not require the same proportion of material handling and quality assurance