Problem:
Comparing costs from ABC and single-rate systems
Sawyer 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 Indirect Activity Costs
|
Allocation Base
|
Estimated Quantity of Allocation Base
|
|
Materials handling
|
$ 115,000
|
Kilos
|
23,000 kilos
|
|
Packaging
|
204,000
|
Machine hours
|
4,160 hours
|
|
Quality assurance
|
114,000
|
Samples
|
1,900 samples
|
|
Total indirect costs
|
$ 433,000
|
|
|
Other production information includes the following:
|
Commercial Containers
|
Travel Packs
|
|
Units produced
|
3,400 containers
|
55,000 packs
|
|
Weight in kilos
|
17,000
|
16,500
|
|
Machine hours
|
2,720
|
550
|
|
Number of samples
|
340
|
825
|
Requirements
1. Compute the cost allocation rate for each activity.
2. Use the activity-based cost allocation rates to compute the activity costs per unit of the commercial containers and the travel packs. (Hint: First compute the total activity costs allocated to each product line, and then compute the cost per unit.)
3. Sawyer's original single-allocation-base costing system allocated indirect costs to products at $150 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 indirect activity-based costs per unit to the indirect costs per unit from the single-allocation-base system. How have the unit costs changed? Explain why the costs changed as they did.