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.

Short 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

Step-by-step solution

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}$