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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

Question:Treat Dog Collars uses activity-based costing. Treat’s system has the following features:

___________________________________________________________________

Activity Allocation BasePredetermined

Overhead Allocation Rate

Purchasing Number of purchase orders \( 60.00 per purchase order

Assembling Number of parts 0.36 per part

Packaging Number of finished collars 0.19 per collar

___________________________________________________________________

Each collar has three parts, direct materials cost is \)5.00 per collar, and direct laborcost is \(4.00 per collar. Suppose Animal Hut has asked for a bid on 30,000 dog collars.Treat will issue a total of 175 purchase orders if Animal Hut accepts Treat’s bid.

Requirements

1. Compute the total estimated cost Treat will incur to purchase the needed materialsand then assemble and package 30,000 dog collars. Also compute the cost percollar.

2. For bidding, Treat adds a 40% markup to total cost. What total price will the companybid for the entire Animal Hut order?

3. Suppose that instead of an ABC system, Treat has a traditional product costingsystem that allocates indirect costs at the rate of \)9.50 per direct labor hour. Thedog collar order will require 9,000 direct labor hours. What total price will Treat bidusing this system’s total cost?

4. Use your answers to Requirements 2 and 3 to explain how ABC can help Treatmake a better decision about the bid price it will offer Animal Hut.

Martin, Inc. manufactures bookcases and uses an activity-based costing system. Martin’s activity areas and related data follow:

Activity

Budgeted Cost of Activity

Allocation Base

Predetermined Overhead Allocation Rate

Materials handling

\( 230,000

Number of parts

\)1.50

Assembly

3,200,000

Number of assembling direct labor hours

16.00

Finishing

150,000

Number of finished units*

3.00

*Refers to the number of units receiving the finishing activity, not the number of units transferred to Finished Goods Inventory

Martin produced two styles of bookcases in April: the standard bookcase and an unfinished bookcase, which has fewer parts and requires no finishing. The totals for quantities, direct materials costs, and other data follow:

Product

Total Units Produced

Total Direct materials Costs

Total Direct Labor Costs

Total Number of Parts

Total Assembling Direct Labor Hours

Standard bookcase

3,000

\(54,000

\)67,500

9,000

4,500

Unfinished bookcase

3,500

56,000

52,500

7,000

3,500

Requirements

3. Which product costs are reported in the external financial statements? Which costs are used for management decision making? Explain the difference.

What is the purpose of quality management systems?

Question:Western, Inc. is a technology consulting firm focused on Web site development and integration of Internet business applications. The president of the company expectsto incur \(640,000 of indirect costs this year, and she expects her firm to work 4,000direct labor hours. Western’s systems consultants provide direct labor at a rate of \)280per hour. Clients are billed at 160% of direct labor cost. Last month, Western’s consultantsspent 170 hours on Halbert’s engagement.

Requirements

1. Compute Western’s predetermined overhead allocation rate per direct labor hour.

2. Compute the total cost assigned to the Halbert engagement.

3. Compute the operating income from the Halbert engagement.

Question:Low Range produces fleece jackets. The company uses JIT costing for its JIT production system.

Low Range has two inventory accounts: Raw and In-Process Inventory and

Finished Goods Inventory. On March 1, 2018, the account balances were Raw and In-Process Inventory, \(9,000; Finished Goods Inventory, \)1,700.

The standard cost of a jacket is \(40, composed of \)12 direct materials plus \(28 conversion costs. Data for March’s activities follow:

Number of jackets completed 15,000

Number of jackets sold (on account, for \)50 each) 14,600

Direct materials purchased (on account) \( 177,500

Conversion costs incurred \) 521,000

Requirements

3. Use a T-account to determine the March 31, 2018, balance of Raw and In-Process Inventory.
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