ACCT520 – Fall 2013 Chapter 11 – Homework Assignment Name: ________________________ Page 1 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. Irene Weissman, the president of ADA enterprises has just read about activity-based costing in a trade journal. With some curiosity and interest, she asked JP, the financial controller 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: Activity Diomycin Homycin Addolin Cost of direct materials $ 205,000 $ 265,000 $ 258,000 Cost of direct labor $ 250,000 $ 234,000 $ 263,000 Number of direct labor hours 7,200 6,800 2,000 Number of capsules 1,000,000 500,000 300,000 ADA has identified the following activities as cost drivers and has allocated them to total overhead cost of $200,000 as follows: Activity Cost Driver Budgeted Overhead Cost Cost Driver Volume Machine setup Setup hours $ 16,000 1,600 Plant management Workers $ 36,000 1,200 Supervision of direct labor Direct labor hours $ 46,000 1,150 Quality inspection Inspection hours $ 50,400 1,050 Expediting orders Customers served $ 51,600 645 JP 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. SUPERVISION OF DIRECT LABOR: Supervisors spend their time supervising production. The amount of time they spend on each product is proportional to the direct labor hours worked. QUALITY INSPECTION: 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

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