Question

Maloney Pharmaceuticals manufactures an​ over-the-counter allergy medication called Breathe.

Maloney 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

Maloney​'s ​controller,Sylvia DelGudico​, has just returned from a conference on ABC. She asks Kyle Yeung​, supervisor of the Breathe product​ line, to help her develop an ABC system. DelGudico and Yeung identify the following​ activities, related​ costs, and cost allocation​ bases

	Estimated Indirect	Allocation	Estimated Quantity
Activity	Activity Costs	Base	of Allocation Base
Materials handling. . . . . . . . . .	$190,000	Kilos	19,000 kilos
Packaging. . . . . . . . . . . . . . . .	400,000	Machine hours	2,000 hours
Quality assurance. . . . . . . . . .	112,500	Samples	2,250 samples
Total indirect costs. . . . . . . . . .	$702,500

The​ commercial-container Breathe product line had a total weight of 8,000 ​kilos, used 1,200 machine​ hours, and required 200 samples. The​ travel-pack line had a total weight of 6,000​kilos, used 400 machine​ hours, and required 300 samples. Maloney produced 2,500 commercial containers of Breathe and 50,000 travel packs.

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

Mat. handling

/

=

per kilo

Packaging

/

=

per hour

QA

/

=

per sample

Requirement 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.) ​(Round the cost per unit to the nearest​ cent.)

cost per unit to the nearest​ cent.)

	Commercial Container
Materials handling
Packaging
Quality assurance
Total indirect costs
/ Number of units
Indirect activity cost per unit

Travel Pack

Requirement 3. The​ company's original​ single-allocation-based cost system allocated indirect costs to products at $300 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.

							Indirect cost
Product			x			=	allocated
Commercial			x			=
Travel			x			=

Now compute the indirect cost per unit for each product under the original​ single-allocation-base system. ​(Round the cost per unit to the nearest​ cent.)

Now compute the indirect cost per unit for each product under the original​ single-allocation-base system. ​(Round the cost per unit to the nearest​ cent.)

	Commercial Container
Total indirect costs allocated
/ Number of units
Indirect cost per unit

Travel Pack

Requirement 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.

The original system▼(overcosted ,undercosted )the commercial containers and▼(overcosted ,undercosted) the travel packs.The original system allocated▼(3 times as much indirect costs to commercial containers as to travel packs, 3 times as much indirect costs to travel packs as to commercial containers,the same amount of indirect costs to travel packs as to commerical containers). ​However, commercial containers▼(did not use 3 times as much of the material handling and quality assurance resources ,used the same amount of indirect costs as the travel packs). The ABC system▼(does not recognize that commercial containers do not require as much material handling and quality assurance as travel packs ,recognizes that commercial containers do not require 3 times as much material handling and quality assurance as travel packs ,recognizes that commercial containers require the same amount of material handling and quality assurance as travel packs). ​So, relative to the original​ system, ABC allocates▼(less ,more )of the material handling and quality assurance costs to commercial containers.

Answer 1

1)

	Estimated overhead cost	/	Estimated allocation base	=	Activity cost allocation rate
Materials handling	$190000	/	19000	=	$10	per kilo
Packaging	$400000	/	2000	=	$200	per hour
Quality assurance	$112500	/	2250	=	$50	per sample

2)

	Commercial Container	Travel Pack
Materials handling	(8000*$10)= $80000	(6000*$10)= $60000
Packaging	(1200*$200)= 240000	(400*$200)= 80000
Quality assurance	(200*$50)= 10000	(300*$50)= 15000
Total indirect costs	$330000	$155000
/Number of units	2500	50000
Indirect activity cost per unit	$132	$3.10

3)

					Indirect cost
Product	Cost allocation rate	*	Actual quantity of allocation base	=	allocated
Commercial	$300	*	1200	=	$360000
Travel	$300	*	400	=	$120000

	Commercial Container	Travel Pack
Total indirect costs allocated	$360000	$120000
/Number of units	2500	50000
Indirect cost per unit	$144	$2.4

4) The original system overcosted the commercial containers and undercosted the travel packs. The original system allocated 3 times as much indirect costs to commercial containers as to travel packs. However, commercial containers did not use 3 times as much of the material handling and quality assurance resources. The ABC system recognizes that commercial containers do not require 3 times as much material handling and quality assurance as travel packs ​So, relative to the original​ system, ABC allocates less of the material handling and quality assurance costs to commercial containers.

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