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

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.)

Short answer

Answer

Activity-based cost per unit

For Commercial Containers:$54

For Travel Packs: $1.8

Step-by-step solution

Computation for Commercial containers

$$\begin{gathered} \mathrm{Material}\mathrm{handling}\mathrm{cost}=\mathrm{Predetermined}\mathrm{overhead}\mathrm{allocation}\mathrm{rate}\times \mathrm{Total}\mathrm{weights}\mathrm{of}\mathrm{commercial}\mathrm{container} \\ =\$5\times 9,600 \\ =\$48,000 \\ \mathrm{Packaging}\mathrm{Cost}=\mathrm{Predetermined}\mathrm{overhead}\mathrm{allocation}\mathrm{rate}\times \mathrm{Total}\mathrm{machine}\mathrm{hour}\mathrm{by}\mathrm{commercial}\mathrm{container} \\ =\$40\times 1,680 \\ =\$67,200 \\ \mathrm{Quality}\mathrm{assurance}\mathrm{cost}=\mathrm{Predetermined}\mathrm{overhead}\mathrm{allocation}\mathrm{rate}\times \mathrm{Total}\mathrm{no}.\mathrm{of}\mathrm{samples}\mathrm{by}\mathrm{commercial}\mathrm{container} \\ =\$60\times 240 \\ =\$14,400 \\ \mathrm{Total}\mathrm{indirect}\mathrm{cost}\mathrm{for}\mathrm{commercial}\mathrm{containers}=\mathrm{Material}\mathrm{handling}\mathrm{cost}+\mathrm{Packaging}\mathrm{cost}+\mathrm{Quality}\mathrm{Assurance}\mathrm{Cost} \\ =\$48,000+\$67,200+\$14,400 \\ =\$129,600 \end{gathered}$$

$$\begin{gathered} \mathbf{Indirect}\mathbf{}\mathbf{Cost}\mathbf{}\mathbf{per}\mathbf{}\mathbf{unit}\mathbf{=}\frac{\mathbf{Total}\mathbf{}\mathbf{Indirect}\mathbf{}\mathbf{Cost}\mathbf{}}{\mathbf{Total}\mathbf{}\mathbf{Units}\mathbf{}\mathbf{Produced}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{\$}\mathbf{129}\mathbf{,}\mathbf{600}}{\mathbf{2}\mathbf{,}\mathbf{400}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{}\mathbf{\$}\mathbf{54} \end{gathered}$$

Computation for Travel Packs

$$\begin{gathered} \mathrm{Material}\mathrm{handling}\mathrm{cost}=\mathrm{Predetermined}\mathrm{overhead}\mathrm{allocation}\mathrm{rate}\times \mathrm{Total}\mathrm{weights}\mathrm{of}\mathrm{Travel}\mathrm{packs} \\ =\$5\times 5,000 \\ =\$25,000 \\ \mathrm{Packaging}\mathrm{Cost}=\mathrm{Predetermined}\mathrm{overhead}\mathrm{allocation}\mathrm{rate}\times \mathrm{Total}\mathrm{machine}\mathrm{hour}\mathrm{by}\mathrm{Travel}\mathrm{Packs} \\ =\$40\times 500 \\ =\$20,000 \\ \mathrm{Quality}\mathrm{assurance}\mathrm{cost}=\mathrm{Predetermined}\mathrm{overhead}\mathrm{allocation}\mathrm{rate}\times \mathrm{Total}\mathrm{no}.\mathrm{of}\mathrm{samples}\mathrm{by}\mathrm{Travel}\mathrm{Packs} \\ =\$60\times 750 \\ =\$45,000 \\ \mathrm{Total}\mathrm{indirect}\mathrm{cost}\mathrm{for}\mathrm{commercial}\mathrm{containers}=\mathrm{Material}\mathrm{handling}\mathrm{cost}+\mathrm{Packaging}\mathrm{cost}+\mathrm{Quality}\mathrm{Assurance}\mathrm{Cost} \\ =\$25,000+\$20,000+\$45,000 \\ =\$90,000 \end{gathered}$$

$$\begin{gathered} \mathbf{Indirect}\mathbf{}\mathbf{Cost}\mathbf{}\mathbf{per}\mathbf{}\mathbf{unit}\mathbf{=}\frac{\mathbf{Total}\mathbf{}\mathbf{Indirect}\mathbf{}\mathbf{Cost}\mathbf{}}{\mathbf{Total}\mathbf{}\mathbf{Units}\mathbf{}\mathbf{Produced}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{\$}\mathbf{90}\mathbf{,}\mathbf{000}}{\mathbf{50}\mathbf{,}\mathbf{000}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{}\mathbf{\$}\mathbf{1}\mathbf{.}\mathbf{8} \end{gathered}$$