Volume-Based Costing versus ABC ADA Pharmaceutical Company produces three drugs— Diomycin, Homycin, and Addolin—belonging to the analgesic (painkiller) 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:
Required (Round all answers to two decimal points) 1. Use the firm’s current costing system to calculate the unit cost of each product. 2. Use the activity-based cost system to calculate the unit cost of each product. 3. The two cost systems provide different results; give several reasons for this. Why might these differences be strategically important to ADA Pharmaceutical? How does ABC add to ADA’s competitive advantage? 4. How and why may firms in the pharmaceutical industry use ABC? What is the strategic advantage?
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