McNeilMcNeil Pharmaceuticals manufacturers an over-the-counter allergy medicatio
ID: 2605274 • Letter: M
Question
McNeilMcNeil Pharmaceuticals manufacturers 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:
1. Compute the predetermined overhead allocation rate for each activity.
2. 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.)
3. McNeilMcNeil's original single plantwide overhead allocation rate costing system allocated indirect costs to products at $ 154.88$154.88 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.
4. Compare the indirect activity-based costs per unit to the indirect costs per unit from the traditional system. How have the unit costs changed? Explain why the costs changed. Estimated Estimated Quantity Activity Indirect Costs Allocation Base of Allocation Base Materials handling $98,000 Number of kilos 24,500 kilos Packaging 209,000 Number of machine hours 2,786 hours Quality assurance 124,500 Number of samples 2,075 samples Total indirect costs $431,500 Actual production information includes the following: Commercial Containers Travel Packs Units produced 2,400 containers 56,000 packs Weight in kilos 12,000 11,200 Machine hours 1,920 560 Number of samples 240 840
Estimated
Estimated Quantity
Activity
Indirect Costs
Allocation Base
of Allocation Base
Materials handling
$98,000
Number of kilos
24,500
kilos
Packaging
209,000
Number of machine hours
2,786
hours
Quality assurance
124,500
Number of samples
2,075
samples
Total indirect costs
$431,500
Actual production information includes the following:
Commercial Containers
Travel Packs
Units produced
2,400
containers
56,000
packs
Weight in kilos
12,000
11,200
Machine hours
1,920
560
Number of samples
240
840
Estimated
Estimated Quantity
Activity
Indirect Costs
Allocation Base
of Allocation Base
Materials handling
$98,000
Number of kilos
24,500
kilos
Packaging
209,000
Number of machine hours
2,786
hours
Quality assurance
124,500
Number of samples
2,075
samples
Total indirect costs
$431,500
Explanation / Answer
Answer
1. Allocation Rate for each activity Activity Estimated Indirect Activity Costs Estimated Qty. of Allocation Base Allocation Rate Per Activity Materials Handling 98000 24500 4 Kilo Packaging 209000 2786 75 Machine Hrs. Quality Assurance 124500 2075 60 Samples 2. Computation of Activity Costs /Unit Commercial Containers Travel Packs Materials Handling at 5/Kilo 12000 60000 11200 56000 Packaging at 40/M.c.hr. 1920 76800 560 18400 Quality Insurance 60/Sample 240 14400 840 50400 Total Indirect Costs 151200 124800 Units Produced 2400 56000 Cost/unit(Total costs/No.of Units) 63 2.23 3.Allocation as per M/c hr. Commercial Containers Travel Packs Machine Hours 1920 560 Allocation rate /M/c hr. 154.88 154.88 Total costs 297370 86733 Units Produced 2400 56000 Indirect cost/unit 123.90 1.55 4. Comparison of Unit Costs As per Activity based costing 63 2.23 As per Single alloction base 123.90 1.55 Cost/unit has reduced for both under ABC As per the single allocation system,having uniform rate per allocation base- the commercial containers utilising greater machine hours has the greater total cost. Whereas, Under ABC, Indirect costs are allocated according to different activities involved- whereby, lesser cost per activity base -actually evens out & reduces the total cost & hence the reduced cost/unit under this system.