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.