Purdue University Razorback Remedies Activity Based Costing System Calculations

Purdue University Global

### Question Description

Need help with my Accounting question - I’m studying for my class.

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

Required

• 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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Activity

Materials
Handling

Packaging
Quality
Control
Total
Indirect
Costs

Estimated
Indirect cost

Cost Driver

\$

350,000 Pounds

\$

Machine
500,000 Hours

\$

Number of
250,000 Samples

Estimated
Activity

Pre-Determined Overhead Rate Work

58,000

Estimate of total indirect

8,000

Estimated number of
machine hours

6,000

Rate

\$ 1,100,000
Indirect Cost to Large
Containers
Large
Containers

Units
Produced
Weight in
pounds

Machine
hours
Number of
samples

20,000

Small
Containers

6,000
\$

137.50

18,000

Total
Indirect Cost \$

825,000

6,000

2,000

Total
Indirect Cost
Per Unit
\$

41.25

1,000

5,000

40,000

180,000

Number of
Machine
Hours
Rate

d Overhead Rate Work

Cost per unit of cost driver
Cost of
Materials
Handling per
pound
\$
6.03
Cost of
packaging per
hour
\$
62.50
Cost of quality
control per
sample
\$
41.67

\$ 1,100,000

8,000

\$

137.50

Indirect Cost
Large

Indirect Cost to Small
Containers

\$

\$

\$

Indirect Cost
Small

2,000

Materials
Handling

\$ 241,379.31 \$ 108,620.69

137.50

Packaging

\$

Quality
Control

\$ 41,666.67 \$ 208,333.33

275,000

1.53

375,000 \$

125,000

Total Indirect
Cos...

svantass (386)
Rice University
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