Comparing costs from ABC and single-rate systemsHarcourt 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:Other production information includes the following:RequirementsHarcourt’s original single plantwide overhead allocation rate system allocated indirect costs to products at $140.00 per machine hour. Compute the total indirect costs allocated to the commercial containers and to the travel packs under the original system. Then compute the indirect cost per unit for each product. Round to two decimal places.Compute the predetermined overhead allocation rate for each activity.Use the predetermined overhead allocation rates to compute the activity-based costs per unit of the commercial containers and the travel packs. Round to two decimal places. (Hint: First compute the total activity-based costs allocated to each product line, and then compute the cost per unit.)Compare the indirect activity-based costs per unit to the indirect costs per unit from the traditional system. How have the unit costs changed? Explain Why the costs changed as they did. Estimated Quantityof Allocation Base24,000 kilos3.000 hours1,900 samplesEstimatedActivityMaterials handlingPackagingQuality assuranceTotal indirect costsAllocation BaseNumber of kilosNumber of machine hoursNumber of samplesIndirect Cost$ 96,000210,000114,000$ 420,000 Commercial ContainersTravel PacksUnits producedWeight in kilosMachine hoursNumber of samples51,000 packs2,800 containers9,8001,9605,100510765560

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FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

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Comparing costs from ABC and single-rate systems

Harcourt 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:

Other production information includes the following:

Requirements

Harcourt’s original single plantwide overhead allocation rate 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.
Compute the predetermined overhead allocation rate for each activity.
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.)
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 as they did.

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

Commercial Containers
Travel Packs
Units produced
Weight in kilos
Machine hours
Number of samples
51,000 packs
2,800 containers
9,800
1,960
5,100
510
765
560

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