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Chapter 19: 33PGA_1 (page 1076)


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

Expert verified

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

01

Computation of indirect cost for commercial containers

TotalIndirectCost=Plantwideoverheadallocationrate×Totalmachinehourusedbycommercialcontainers=$81.50×1,680=$136,920Indirectcostperunit=TotalIndirectcostTotalunitsproduced=$136,9202,400=$57.05

02

Computation of indirect cost for travel packs

TotalIndirectCost=Plantwideoverheadallocationrate×Totalmachinehourusedbytravelpacks=$81.50×500=$40,750Indirectcostperunit=TotalIndirectcostTotalunitsproduced=$40,75050,000=$0.815

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Most popular questions from this chapter

PetSmart, Inc. is a large specialty pet retailer of services and solutions for the needs of pets. In addition to selling pet food and pet products, PetSmart also offers dog grooming services including bath, nail trim, teeth brushing, aromatherapy to reduce everyday stress, and nail polish and stickers. PetSmart even offers a Top Dog service that includes a premium shampoo, milk bath conditioner, scented cologne spritz, teeth brushing, and bandana or bow.

Assume PetSmart, Inc. expects to incur \(380,000 of indirect costs this year. The company allocates indirect costs based on the following activities:

___________________________________________________________________

Activity Estimated Allocation Base Estimated Quantity

Cost of Allocation

Base____

Admission \) 60,000 Number of admissions 20,000

Cleaning 240,000 Cleaning direct labor hours 100,000

Grooming 80,000 Grooming direct labor hours 4,000

Total indirect costs $ 380,000________________________________________

Requirements

1. Calculate the predetermined overhead allocation rate for each activity.

Koehler (see Exercise E19-15) makes handheld calculators in two models—basic and professional—and wants to refine its costing system by allocating overhead using departmental rates. The estimated \(721,000 of manufacturing overhead has been divided into two cost pools: Assembly Department and Packaging Department. The following data have been compiled:

Assembly Packaging

Department Department Total

Overhead costs \) 456,500 \( 264,500 \) 721,000

Machine hours:

Basic Model 185,000 MHr 45,000 MHr 230,000 MHr

Professional Model 230,000 MHr 55,000 MHr 285,000 MHr

Total 415,000 MH 100,000 MHr 515,000 MHr

Direct labor hours:

Basic Model 20,000 DLHr 50,000 DLHr 70,000 DLHr

Professional Model 105,125 DLHr 280,625 DLHr 385,750 DLHr

Total 125,125 DLHr 330,625 DLHr 455,750 DLHr

Compute the predetermined overhead allocation rates using machine hours as the allocation base for the Assembly Department and direct labor hours for the Packaging Department. How much overhead is allocated to the basic model? To the professional model? Round allocation rates to two decimal places and allocated costs to whole dollars.

Koehler (see Exercise E19-15 and Exercise E19-16) makes handheld calculators in two models—basic and professional—and wants to further refine its costing system by allocating overhead using activity-based costing. The estimated \(721,000 of manufacturing overhead has been divided into three primary activities: Materials Handling, Machine Setup, and Insertion of Parts. The following data have been compiled:

Material Handling

Machine Setup

Insertion of Parts

Total

Overhead costs

\) 45,000

\( 136,000

\) 540,000

$ 721,000

Allocation base

Number of parts

Number of setups

Number of parts

Expected usage:

Basic Model

32 parts per calculator

24 setups per year

32 parts per calculator

Professional

Model

58 parts per calculator

44 setups per year

58 parts per calculator

Requirement 2

Compare your answers for Exercise E19-15, Exercise E19-16, and Exercise E19-17. What conclusions can you draw?

The Alexander Manufacturing Company in Rochester, Minnesota, assembles and tests electronic components used in smartphones. Consider the following data regarding component T24 (amounts are per unit):

Direct materials cost \( 81.00

Direct labor cost 21.00

Activity-based costs allocated ?

Total manufacturing product cost ?

The activities required to build the component follow:

Activity

Allocation Base

Cost Allocated to Each Unit

Start Station

Number of raw component chassis

3 X \)1.50 = \(4.50

Dip Insertion

Number of dip insertions

? X 0.50 = 14.50

Manual Insertion

Number of manual insertions

13 X 0.40 = ?

Wave solder

Number of components solders

3 X 1.50 = 4.50

Backload

Number of backload insertions

7 X ? = 2.80

Test

Number of testing hours

0.39 60.0 = ?

Defect analysis

Number of defect analysis hours

0.10 X ? = 4.00

Total activity-based costs

\) ?

Requirements

1. Complete the missing items for the two tables.

Eason Company manufactures wheel rims. The controller expects the following ABC allocation rates for 2018:

Activity Allocation Base Predetermined Overhead

Allocation Rate

Materials handling Number of parts $ 4.00 per part

Machine setup Number of setups 400.00 per setup

Insertion of parts Number of parts 26.00 per part

Finishing Number of finishing hours 90.00 per hour

Eason produces two wheel rim models: standard and deluxe. Expected data for 2018 are as follows:

Standard Deluxe

Parts per rim 4.0 7.0

Setups per 500 rims 18.0 18.0

Finishing hours per rim 1.0 5.5

Total direct hours per rim 5.0 6.0

The company expects to produce 500 units of each model during the year.

Requirements

2. Prior to 2018, Eason used a single plantwide overhead allocation rate system with direct labor hours as the allocation base. Compute the predetermined overhead allocation rate based on direct labor hours for 2018. Use this rate to determine the estimated indirect manufacturing cost per wheel rim for each model, to the nearest cent.
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