Reference no: EM132600355

ADA Pharmaceutical Company produces three drugs-Diomycin, Homycin, and Addolin-belonging to the analgesic (pain-killer) family of medication. Since its inception four years ago, ADA has used a direct labor hour-based system to assign manufacturing overhead costs to products.

Eme Weissman, the president of ADA Pharmaceutical, has just read about activity-based costing in a trade journal. With some curiosity and interest, she asked her financial controller, Takedo Simon, to examine differences in product costs between the firm's current costing and activity-based costing systems.

ADA has the following budget information for the year:

                                                                     Diomycin                   Homycin                          Addolin

Cost of direct materials                          $196,000                     $256,000                     $249,000

Cost of direct labor                                  241,000                         225,000                      254,000

Number of direct labor hours                            7,110                          6,710                         1,910

Number of capsules                                        910,000                         491,000                   291,000

ADA has identified the following activities and cost drivers and has assigned them a total overhead cost of $195,500.

Activity Cost Driver Budgeted Overhead Cost Budgeted Cost Driver Volume

Machine setup              Setup hours              $15,100           1,510

Plant management         Number of Workers        35,100            1,110

Supervision of direct labor Direct labor hours        45,100             15,100

Quality inspection              Inspection hours             49,500          1,005

Order expediting              Customers served             50,700            600

Total overhead                                                      $195,500

Take do selected the cost drivers with the following justifications:

SETUP HOURS: The cost driver of setup hours is used because the same product takes about the same amount of setup time regardless of size of batch. For different products, however, the setup time varies.

NUMBER OF WORKERS: Plant management includes plant maintenance and corresponding managerial duties that make production possible. This activity depends on the number of workers. The more workers involved, the higher the cost.

DIRECT LABOR HOURS: Supervisors spend their time supervising production. The amount of time they spend on each product is proportional to the direct labor hours worked.

INSPECTION HOURS: Inspection involves testing a number of units in a batch. The time varies for different products but is the same for all similar products.

NUMBER OF CUSTOMERS SERVED: The need to expedite production increases as the number of customers served by the company increases. Thus, the number of customers served by ADA is a good measure of expediting production orders.

Takedo gathered the following information about the cost driver volume for each product:

                                                     Diomycin                  Homycin                    Addolin

Setup hours                              155                          555                      755

Number of workers                     155                           355                      555

Direct labor hours                       7,110                           6,710                   1,910

Inspection hours                            105                          155                         655

Customers served                          36                                91                         455

Required:

Question 1. Use the firm's current costing system to calculate the unit cost of each product.

Question 2. Use the activity-based cost system to calculate the unit cost of each product.