Logan Pharmaceutical produces two products: Caltrate and Dorkamine. The company uses activity-based costing (ABC) to allocate manufacturing costs to each product line. The costs incurred by the Quality Control Department average $5 million per year and constitute one of the largest components of the company’s total manufacturing overhead. The Quality Control Department conducts routine inspections at two critical points. First, all raw materials are inspected before they are entered into the production process. Second, all completed batches of product are inspected before being shipped to the finished goods warehouse. The department’s costs are assigned to two activity cost pools: (1) preproduction inspections, and (2) postproduction inspections. Costs are assigned to the pools based on the number of employees engaged in each activity. Of the department’s 16 full-time employees, 4 are responsible for preproduction inspections and 12 are responsible for postproduction inspections.
Costs assigned to the preproduction pool are allocated to products based on the number of materials shipments received for each product line. Costs assigned to the postproduction pool are allocated to products based on the number of batches of each product produced. For the upcoming year, Logan Pharmaceutical estimates the following activity levels:

The materials used to produce Caltrate can be ordered only in small quantities and therefore must be ordered frequently. The company’s four preproduction inspectors devote a disproportion-ate amount of their time inspecting the 900 shipments of Caltrate materials. Dorkamine can be produced only in small batches and therefore must be produced frequently. Most of the problems associated with completed batches of Dorkamine can be traced to poor-quality materials. Very few problems are associated with the quality of Caltrate materials.

a. Assign the Quality Control Department’s costs to the individual cost pools.
b. Allocate the preproduction cost pool to each product line.
c. Allocate the inspection cost pool to each product line.
d. Suggest how Logan Pharmaceutical might reassign responsibilities to make better use of its quality controlinspectors.

  • CreatedApril 17, 2014
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