Comprehensive ABC implementation (Learning Objectives 2 &3) Durbin Pharmaceutica
ID: 2342236 • Letter: C
Question
Comprehensive ABC implementation (Learning Objectives 2 &3) Durbin Pharmaceuticals manufactures an over-the-counter allergy medication called Breathe. Durbin is trying to win market share from Sudafed and Tylenol. The company 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. Durbin's controller, Katarina Hoffman, has just returned from a conference on ABC. She asks Bradley Williams, supervisor of the Breathe product line, to help her develop an ABC system. Hoffman and Williams identify the following activities, related costs, and cost allocation bases:Explanation / Answer
Answer
Indirect Cost
Allocation base
No. of allocation base
Cost Allocation Rate [ANSWER]
Material Handling
$ 160,000.00
kilos
20,000
kilos
$ 8.00
per kilos
Packaging
$ 390,000.00
machine hours
2,000
hours
$ 195.00
per hours
Quality Assurance
$ 112,000.00
samples
1,600
samples
$ 70.00
per samples
$ 662,000.00
COMMERCIAL CONTAINER ALLOCATION
Cost Allocation Rate
No. of allocation base
Amount of Indirect cost allocated
Material Handling
$ 8.00
per kilos
8,700
$ 69,600.00
Packaging
$ 195.00
per hours
900
$ 175,500.00
Quality Assurance
$ 70.00
per samples
270
$ 18,900.00
Total Indirect cost Allocated
$ 264,000.00
No. of units
3,000
Indirect Cost of each unit
$ 88.00
TRAVEL PACK ALLOCATION
Cost Allocation Rate
No. of allocation base
Amount of Indirect cost allocated
Material Handling
$ 8.00
per kilos
4,450
$ 35,600.00
Packaging
$ 195.00
per hours
300
$ 58,500.00
Quality Assurance
$ 70.00
per samples
370
$ 25,900.00
Total Indirect cost Allocated
$ 120,000.00
No. of units
20,000
Indirect Cost of each unit
$ 6.00
Working
Commercial Container
Travel Pack
A
No. of machine hours
900
300
B
Overhead rate
$ 350.00
$ 350.00
C = A x B
Amount of Indirect cost allocated
$ 315,000.00
$ 105,000.00
D
Units
3,000
20,000
E = C/D
Indirect cost per unit
$ 105.00
$ 5.25
Commercial Container
Travel Pack
Cost per unit as per ABC Method
$ 88.00
$ 6.00
Cost per unit as per original system
$ 105.00
$ 5.25
--The container cost has changed by $ 17 per unit (Increased) and Travel pack cost has changed by $ 0.75 (decrease) per unit.
--These changes are because of different amount of allocation base used to allocate indirect cost. Under ABC method, various allocation bases were used, while in the original system, only machine hours were used to allocate indirect cost.
Indirect Cost
Allocation base
No. of allocation base
Cost Allocation Rate [ANSWER]
Material Handling
$ 160,000.00
kilos
20,000
kilos
$ 8.00
per kilos
Packaging
$ 390,000.00
machine hours
2,000
hours
$ 195.00
per hours
Quality Assurance
$ 112,000.00
samples
1,600
samples
$ 70.00
per samples
$ 662,000.00
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