Question

McNeilMcNeil 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:

1. Compute the predetermined overhead allocation rate for each activity.

2. 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.)

3. McNeilMcNeil​'s original single plantwide overhead allocation rate costing system allocated indirect costs to products at $ 154.88$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.

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. Estimated Estimated Quantity Activity Indirect Costs Allocation Base 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 11,200 Machine hours 1,920 560 Number of samples 240 840

	Estimated		Estimated Quantity
Activity	Indirect Costs	Allocation Base	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		11,200
Machine hours	1,920		560
Number of samples	240		840

Answer 1

Answer

1. Allocation Rate for each activity
Activity	Estimated Indirect Activity Costs	Estimated Qty. of Allocation Base	Allocation Rate	Per Activity
Materials Handling	98000	24500	4	Kilo
Packaging	209000	2786	75	Machine Hrs.
Quality Assurance	124500	2075	60	Samples
2. Computation of Activity Costs /Unit
	Commercial Containers		Travel Packs
Materials Handling at 5/Kilo	12000	60000	11200	56000
Packaging at 40/M.c.hr.	1920	76800	560	18400
Quality Insurance 60/Sample	240	14400	840	50400
Total Indirect Costs		151200		124800
Units Produced	2400		56000
Cost/unit(Total costs/No.of Units)		63		2.23
3.Allocation as per M/c hr.
	Commercial Containers	Travel Packs
Machine Hours	1920	560
Allocation rate /M/c hr.	154.88	154.88
Total costs	297370	86733
Units Produced	2400	56000
Indirect cost/unit	123.90	1.55
4. Comparison of Unit Costs
As per Activity based costing	63	2.23
As per Single alloction base	123.90	1.55
Cost/unit has reduced for both under ABC
As per the single allocation system,having uniform rate per allocation base- the commercial containers utilising greater machine hours has the greater total cost.
Whereas,
Under ABC, Indirect costs are allocated according to different activities involved- whereby, lesser cost per activity base -actually evens out & reduces the total cost & hence the reduced cost/unit under this system.