Razorback Remedies produces a natural allergy treatment in tablet form. The company sells large containers of 1,000 tablets to university health centers and small containers of 50 tablets to health food stores. The company is considering adopting an activity-based costing system and the accountant gathered the following information
Activity
Estimated Indirect Cost
Cost Driver
Estimated Activity
Materials handling
$350,000
Pounds
58,000 pounds
Packaging
500,000
Machine Hours
8,000
hours
Quality control
250,000
Number of Samples
6,000
samples
Total indirect costs
$1,100,000
Other production information follows:
Large Containers
Small Containers
Units produced
20,000
180,000
Weight in pounds
40,000
18,000
Machine hours
6,000
2,000
Number of samples
1,000
5,000
Questions
Razorback’s current system allocates indirect cost to products on the basis of machine hours. Calculate the predetermined overhead application rate per machine hour.
Use the overhead application rate per machine hour to compute the indirect cost applied to each product line (large containers and small containers). In addition, calculate the indirect cost per unit for large and small containers.
Assuming the company wants to convert to an activity-based system, calculate the cost per unit of cost driver for each activity in the first chart above.
Use the cost per unit of cost driver to compute the indirect cost applied to each product line (large containers and small containers). In addition, calculate the indirect cost per unit for large and small containers.
Compare the indirect activity-based cost per unit to the indirect cost per unit from the current (traditional) system. How have unit costs changed? Explain why the costs changed as they did.
Should Razorback convert to activity-based costing? Provide an appropriate justification for your decision.
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