McNeil Pharmaceuticals manufactures an over-the-counter allergy medication called Breathe. McNeil is trying to win market share from Sudafed and Tylenol. McNeil has developed several different Breathe products tailored to specific markets. For example, the company sells 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.
McNeil's controller, Arlene Pittinger, has just returned from a conference on ABC. She asks Gene Barr, supervisor of the Breathe product line, to help her develop an ABC system. Pittinger and Barr identify the following activities, related costs, and cost allocation bases:

The commercial-container Breathe product line had a total weight of 8,000 kilos, used 1,500 machine hours, and 270 required samples. The travel-pack line had a total weight of 6,300 kilos, used 500 machine hours, and 370 required samples. The company produced 2,600 commercial containers of Breathe and 60,000 travel packs.
Requirements
1. Compute the cost allocation rate for each activity.
2. Use the activity-based cost allocation rates to compute the indirect cost of each unit of the commercial containers and the travel packs.
3. The company's original single-allocation-based cost system allocated indirect costs to products at $300 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 activity-based costs per unit to the costs from the simpler original system. How have the unit costs changed? Explain why the costs changed as they did.

Transcribed Image Text:

Estimated Indirect Activity Costs S180,000 420,000 118,000 S/18,000 Activity ia lingy.... Allocation Base of Allocation Base Kilos Machine hours Samples 18,000 kilos 2,200 hours 1,700 samples Quality assurance Total indirect costs