McNeilMcNeil Pharmaceuticals manufacturers an overthecounter

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.

(Hint:

3.

McNeilMcNeil\'s

$ 154.88$154.88

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

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.

Solution

Cost allocation rate for each activity

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

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