Q33PGA_2 - Horngren'S Financial And Managerial Accounting

Question

Willitte 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

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

Step-by-Step Solution

Answer

Predetermined Overhead Allocation Rate

Material Handling: $5

Packaging: $40

Quality Assurance: $60

Step 1: Material handling

$\begin{array}{rcl}\mathit{P}\mathit{r}\mathit{e}\mathit{d}\mathit{e}\mathit{t}\mathit{e}\mathit{r}\mathit{m}\mathit{i}\mathit{n}\mathit{e}\mathit{d}\mathbf{ }\mathit{o}\mathit{v}\mathit{e}\mathit{r}\mathit{h}\mathit{e}\mathit{a}\mathit{d}\mathbf{ }\mathit{a}\mathit{l}\mathit{l}\mathit{o}\mathit{c}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathbf{ }\mathit{r}\mathit{a}\mathit{t}\mathit{e}\mathbf{ }& \mathbf{=}& \mathbf{ }\frac{\mathbf{T}\mathbf{o}\mathbf{t}\mathbf{a}\mathbf{l}\mathbf{ }\mathbf{M}\mathbf{a}\mathbf{t}\mathbf{e}\mathbf{r}\mathbf{i}\mathbf{a}\mathbf{l}\mathbf{ }\mathbf{H}\mathbf{a}\mathbf{n}\mathbf{d}\mathbf{l}\mathbf{i}\mathbf{n}\mathbf{g}\mathbf{ }\mathbf{C}\mathbf{o}\mathbf{s}\mathbf{t}}{\mathbf{T}\mathbf{o}\mathbf{t}\mathbf{a}\mathbf{l}\mathbf{ }\mathbf{N}\mathbf{o}\mathbf{.}\mathbf{ }\mathbf{o}\mathbf{f}\mathbf{ }\mathbf{K}\mathbf{i}\mathbf{l}\mathbf{o}\mathbf{s}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{95}\mathbf{,}\mathbf{000}}{\mathbf{19}\mathbf{,}\mathbf{000}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{5}\end{array}$

Step 2: Packaging

$\begin{array}{rcl}\mathit{P}\mathit{r}\mathit{e}\mathit{d}\mathit{e}\mathit{t}\mathit{e}\mathit{r}\mathit{m}\mathit{i}\mathit{n}\mathit{e}\mathit{d}\mathit{O}\mathit{v}\mathit{e}\mathit{r}\mathit{h}\mathit{e}\mathit{a}\mathit{d}\mathit{A}\mathit{l}\mathit{l}\mathit{o}\mathit{c}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathit{R}\mathit{a}\mathit{t}\mathit{e}& \mathbf{=}& \frac{\mathbf{T}\mathbf{o}\mathbf{t}\mathbf{a}\mathbf{l}\mathbf{P}\mathbf{a}\mathbf{c}\mathbf{k}\mathbf{a}\mathbf{g}\mathbf{i}\mathbf{n}\mathbf{g}\mathbf{C}\mathbf{o}\mathbf{s}\mathbf{t}}{\mathbf{T}\mathbf{o}\mathbf{t}\mathbf{a}\mathbf{l}\mathbf{n}\mathbf{o}\mathbf{.}\mathbf{m}\mathbf{a}\mathbf{c}\mathbf{h}\mathbf{i}\mathbf{n}\mathbf{e}\mathbf{h}\mathbf{o}\mathbf{u}\mathbf{r}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{200}\mathbf{,}\mathbf{000}}{\mathbf{5}\mathbf{,}\mathbf{000}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{40}\\ & & \end{array}$

Step 3: Quality Assurance

$\begin{array}{rcl}\mathit{P}\mathit{r}\mathit{e}\mathit{d}\mathit{e}\mathit{t}\mathit{e}\mathit{r}\mathit{m}\mathit{i}\mathit{n}\mathit{e}\mathit{d}\mathit{O}\mathit{v}\mathit{e}\mathit{r}\mathit{h}\mathit{e}\mathit{a}\mathit{d}\mathit{A}\mathit{l}\mathit{l}\mathit{o}\mathit{c}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathit{R}\mathit{a}\mathit{t}\mathit{e}& \mathbf{=}& \frac{\mathbf{T}\mathbf{o}\mathbf{t}\mathbf{a}\mathbf{l}\mathbf{Q}\mathbf{u}\mathbf{a}\mathbf{l}\mathbf{i}\mathbf{t}\mathbf{y}\mathbf{A}\mathbf{s}\mathbf{s}\mathbf{u}\mathbf{r}\mathbf{a}\mathbf{n}\mathbf{c}\mathbf{e}\mathbf{C}\mathbf{o}\mathbf{s}\mathbf{t}}{\mathbf{T}\mathbf{o}\mathbf{t}\mathbf{a}\mathbf{l}\mathbf{n}\mathbf{o}\mathbf{.}\mathbf{o}\mathbf{f}\mathbf{s}\mathbf{a}\mathbf{m}\mathbf{p}\mathbf{l}\mathbf{e}\mathbf{s}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{112}\mathbf{,}\mathbf{500}}{\mathbf{1}\mathbf{,}\mathbf{875}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{60}\\ & & \end{array}$