Q39PGB_1 - Horngren'S Financial And Managerial Accounting

Question

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:

       Activity                     Estimated                                          Estimated Quantity

                                      Indirect Cost           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

 

Other production information includes the following:

                                            Commercial Containers                   Travel Packs

Units produced                          2,800 containers                       51,000 packs

Weight in kilos                            9,800                                           5,100

Machine hours                            1,960                                              510

Number of samples                      560                                              765

 

Requirements

1. 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.

Step-by-Step Solution

Answer

For Commercial containers

Total Indirect Cost: $274,400

Indirect cost per unit: $98

 

For Travel packs

Total Indirect Cost: $71,400

Indirect cost per unit: $1.4

Step-by-Step-Solution Step 1: Computation of indirect cost for commercial containers

$$\begin{gathered} \mathbf{Total}\mathbf{ }\mathbf{Indirect}\mathbf{ }\mathbf{Cost}\mathbf{=}\mathbf{Plant}\mathbf{ }\mathbf{wide}\mathbf{ }\mathbf{overhead}\mathbf{ }\mathbf{allocation}\mathbf{ }\mathbf{rate}\mathbf{\times }\mathbf{Total}\mathbf{ }\mathbf{machine}\mathbf{ }\mathbf{hour}\mathbf{ }\mathbf{used}\mathbf{ }\mathbf{by}\mathbf{ }\mathbf{commercial}\mathbf{ }\mathbf{containers} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{140}\mathbf{\times }\mathbf{1}\mathbf{,}\mathbf{960} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{274}\mathbf{,}\mathbf{400} \end{gathered}$$

$$\begin{gathered} \mathbf{Indirect}\mathbf{ }\mathbf{cost}\mathbf{ }\mathbf{per}\mathbf{ }\mathbf{unit}\mathbf{=}\frac{\mathbf{Total}\mathbf{ }\mathbf{Indirect}\mathbf{ }\mathbf{cost}}{\mathbf{Total}\mathbf{ }\mathbf{units}\mathbf{ }\mathbf{produced}} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\frac{\mathbf{\$}\mathbf{274}\mathbf{,}\mathbf{400}}{\mathbf{2}\mathbf{,}\mathbf{800}} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{98} \end{gathered}$$

Step 2: Computation of indirect cost for travel packs

$\begin{array}{c}\mathbf{Total}\mathbf{ }\mathbf{Indirect}\mathbf{ }\mathbf{Cost}\mathbf{=}\mathbf{Plant}\mathbf{ }\mathbf{wide}\mathbf{ }\mathbf{overhead}\mathbf{ }\mathbf{allocation}\mathbf{ }\mathbf{rate}\mathbf{\times }\mathbf{Total}\mathbf{ }\mathbf{machine}\mathbf{ }\mathbf{hour}\mathbf{ }\mathbf{used}\mathbf{ }\mathbf{by}\mathbf{ }\mathbf{travel}\mathbf{ }\mathbf{packs}\\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{140}\mathbf{\times }\mathbf{510}\\ \mathbf{=}\mathbf{\$}\mathbf{71}\mathbf{,}\mathbf{400}\end{array}$

$$\begin{gathered} \mathbf{Indirect}\mathbf{ }\mathbf{cost}\mathbf{ }\mathbf{per}\mathbf{ }\mathbf{unit}\mathbf{=}\frac{\mathbf{Total}\mathbf{ }\mathbf{Indirect}\mathbf{ }\mathbf{cost}}{\mathbf{Total}\mathbf{ }\mathbf{units}\mathbf{ }\mathbf{produced}} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\frac{\mathbf{\$}\mathbf{71}\mathbf{,}\mathbf{400}}{\mathbf{51}\mathbf{,}\mathbf{000}} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{1}\mathbf{.}\mathbf{4} \end{gathered}$$