02.07.2022 - 10:19

# Gibson 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. T

Question:

Gibson 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:

 Activity Estimated Indirect Costs Allocation Base Estimated Quantity of Allocation Base Materials handling $98,000 Number of kilos 24,500 kilos Number of machine Packaging 209,000 hours 2,786 hours Quality assurance 124,500 Number of samples 2,075 samples Total indirect costs$ 431,500

Actual production information includes the following:

 Commercial Containers Travel Packs Units produced 3,000 containers 56,000 packs Weight in kilos 15,000 5,600 Machine hours 2,100 560 Number of samples 600 840

1. Gibson’s original single plantwide overhead allocation rate costing system allocated indirect costs to products at $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. 2. Compute the predetermined overhead allocation rate for each activity. 3. 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 fine. and then compute the cost per unit.) 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. Answers (1) • April 17, 2023 в 16:10 1. Under the original system, the total indirect costs allocated to the commercial containers is$325,968 (2,100 machine hours x $154.88 per hour) and the total indirect costs allocated to the travel packs is$86,662.08 (560 machine hours x $154.88 per hour). The indirect cost per unit for the commercial containers is$108.66 ($325,968 ? 3,000 units) and the indirect cost per unit for the travel packs is$1.55 ($86,662.08 ? 56,000 units). 2. The predetermined overhead allocation rate for each activity is as follows: - Materials handling:$3.98 per kilo ($98,000 ? 24,500 kilos) - Packaging:$74.94 per hour ($209,000 ? 2,786 hours) - Quality assurance:$60 per sample ($124,500 ? 2,075 samples) 3. The activity-based costs per unit of the commercial containers and travel packs are as follows: Commercial containers: - Materials handling:$0.60 per unit ($3.98 per kilo x 15,000 kilos ? 3,000 units) - Packaging:$16.81 per unit ($74.94 per hour x 2,100 machine hours ? 3,000 units) - Quality assurance:$12 per unit ($60 per sample x 600 samples ? 3,000 units) - Total activity-based cost per unit:$29.41 Travel packs: - Materials handling: $0.16 per unit ($3.98 per kilo x 5,600 kilos ? 56,000 units) - Packaging: $3.85 per unit ($74.94 per hour x 560 machine hours ? 56,000 units) - Quality assurance: $8.57 per unit ($60 per sample x 840 samples ? 56,000 units) - Total activity-based cost per unit: \$12.58 4. The indirect activity-based costs per unit for both products are significantly lower than the indirect costs per unit under the traditional system. This is because the activity-based costing system more accurately allocates indirect costs based on the specific activities that drive those costs. Under the traditional system, indirect costs were allocated based solely on machine hours, which does not take into account the different levels of activity required for materials handling, packaging, and quality assurance. The activity-based costing system allows for a more precise allocation of costs, resulting in more accurate unit costs for each product.