explain why the costs changed as they did 556840

Comparing costs from ABC and single rate systems

Sawyer 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 Indirect Activity Costs

Allocation Base

Estimated Quantity of Allocation Base

Materials handling

$ 115,000

Kilos

23,000 kilos

Packaging

204,000

Machine hours

4,160 hours

Quality assurance

114,000

Samples

1,900 samples

Total indirect costs

$ 433,000

Other production information includes the following:

Commercial Containers

Travel Packs

Units produced

3,400 containers

55,000 packs

Weight in kilos

17,000

16,500

Machine hours

2,720

550

Number of samples

340

825

Requirements

1. Compute the cost allocation rate for each activity.

2. Use the activity based cost allocation rates to compute the activity costs per unit of the commercial containers and the travel packs. (Hint: First compute the total activity costs allocated to each product line, and then compute the cost per unit.)

3. Sawyer’s original single allocation base costing system allocated indirect costs to products at $150 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.

4. Compare the indirect activity based costs per unit to the indirect costs per unit from the single allocation base system. How have the unit costs changed? Explain why the costs changed as they did.

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