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.

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

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

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

Computation of indirect cost for travel packs

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

role="math" localid="1653280263196" $$\begin{gathered} \mathbf{Indirect}\mathbf{}\mathbf{cost}\mathbf{}\mathbf{per}\mathbf{}\mathbf{unit}\mathbf{=}\frac{\mathbf{Total}\mathbf{}\mathbf{Indirect}\mathbf{}\mathbf{cost}}{\mathbf{Total}\mathbf{}\mathbf{units}\mathbf{}\mathbf{produced}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{\$}\mathbf{71}\mathbf{,}\mathbf{400}}{\mathbf{51}\mathbf{,}\mathbf{000}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{1}\mathbf{.}\mathbf{4} \end{gathered}$$