33PGA_1 - Horngren'S Financial And Managerial Accounting

Question

Willette 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                                              Estimated Quantity

                          Indirect Cost          Allocation Base      of Allocation Base

Materials handling          \( 95,000        Number of kilos                    19,000 kilos

Packaging                         200,000        Number of machine hours   5,000 hours

Quality assurance            112,500        Number of samples             1,875 samples

Total indirect costs       \) 407,500

 

Actual production information includes the following:

                                                Commercial Containers                   Travel Packs

Units produced                            2,400 containers                       50,000 packs

Weight in kilos                             9,600                                             5,000

Machine hours                             1,680                                               500

Number of samples                        240                                                750

 

Requirements

1. Willitte’s original single plantwide overhead allocation rate costing system allocated indirect costs to products at $81.50 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.

 

Step-by-Step Solution

Answer

For Commercial containers

Total Indirect Cost: $136,920

Indirect cost per unit: $57.05

For Travel packs

 

Total Indirect Cost: $40,750

Indirect cost per unit: $0.815

 

Computation of indirect cost for commercial containers

$\begin{array}{c}TotalIndirectCost=Plantwideoverheadallocationrate\times Totalmachinehourusedbycommercialcontainers\\ =\$81.50\times 1,680\\ =\$136,920\end{array}$$\begin{array}{c}Indirectcostperunit=\frac{TotalIndirectcost}{Totalunitsproduced}\\ =\frac{\$136,920}{2,400}\\ =\$57.05\end{array}$

Computation of indirect cost for travel packs

$\begin{array}{c}TotalIndirectCost=Plantwideoverheadallocationrate\times Totalmachinehourusedbytravelpacks\\ =\$81.50\times 500\\ =\$40,750\end{array}$$\begin{array}{c}Indirectcostperunit=\frac{TotalIndirectcost}{Totalunitsproduced}\\ =\frac{\$40,750}{50,000}\\ =\$0.815\end{array}$