Question

Corbett 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:

	Estimated		Estimated Quantity
Activity	Indirect Costs	Allocation Base	of Allocation Base
Materials handling	$96,000	Number of kilos	24,000	kilos
Packaging	210,000	Number of machine hours	3,000	hours
Quality assurance	114,000	Number of samples	1,900	samples
Total indirect costs	$420,000

Actual production information includes the? following:

	Commercial Containers		Travel Packs
Units produced	3,200	containers	51,000	packs
Weight in kilos	12,800		5,100
Machine hours	2,400		510
Number of samples	640		765

CorberttCorbertt?'s

original single plantwide overhead allocation rate costing system allocated indirect costs to products at

$ 140.00$140.00

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.

2.

Compute the predetermined overhead allocation rate for each activity.

3.

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.)

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.

Corbertt original single plantwide overhead allocation rate costing system allocated indirect costs to products at $ 140.00 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.

Answer 1

1) Indirect costs allocated to common containers and travel packs on plant wide rate

	Commerical Containers	Travel packs
Machine Hours	2400	510
Allocation rate	$140	$140
Overheads allocated	$3,36,000	$71,400
No. of units	$3,200	$51,000
Per unit indirect cost	$105.00	$1.40

2) Predetermined overhead allocated rate for each activity

	Indirect costs	Cost driver	Cost per activity
Materials handling	$96,000	24,000	$4.00
Packaging	$2,10,000	3,000	$70.00
Quality Assurance	$1,14,000	1,900	$60.00

3) Indirect cost per unit using the activity based costing

	Commerical Containers	Travel packs
Materials handling	$51,200	$20,400
Packaging	$1,68,000	$35,700
Quality Assurance	$38,400	$45,900
Total indirect costs	$2,57,600	$1,02,000
Per unit indirect cost	$80.50	$2.00

4) We see that the indirect costs per unit allocated to Commercial containers has reduced by $24.5 and has increased for Travel packs by $0.6. This is because under the traditional costing system, the cost was alllocated purely on the basis of machine hours which is muc higher for commercial contrainers as compared to travel packs. As a result higher costs were allocated. However, the under the ABC costing system, the costs are allocated on the basis of activities used for various components which comrpsie the indirect costs. Hence, the per unit cost has reduced for commercial containers.