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

Answer 1

Cost allocation rate for each activity

Estimated Overhead cost		Estimated quantity		predetermined OH = Estimated OH cost / Estimated quantity
Activity	Indirect cost	Allocation base	of allocation
Material handling	98000	Kilos	24500	98000/24500 = 4
Packaging	209000	Machine hours	2786	209000 /2786 = 75
Quality assurance	124500	Samples	2075	124500 / 2075 = 60
	431500

Activity-based cost allocation rates to compute the activity costs per unit of the commercial containers and the travel packs

Commercial Containers
		Activity cost
Units produced	2,400 containers
Weight in kilos	12,000	4	48000
Machine hours	1920	75	144000
Number of samples	240	60	14400
			206400

Travel packs
		Activity cost
Units produced	56000 packs
Weight in kilos	11,200	4	44,800
Machine hours	560	75	42,000
Number of samples	840	60	50400
			137200