Ada Pharmaceutical Company Produces Three Drugs Diomycin Homyc
Ada Pharmaceutical Company Produces Three Drugs Diomycin Homyc
Ada Pharmaceutical Company Produces Three Drugs Diomycin Homyc
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 Enterprises, 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:
ADA has identified the following activities as cost drivers and has allocated them to total
overhead cost of $200,000 as follows:
Required
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 Enterprises? How does ABC add to ADA’s
competitive advantage?
4. How and why may firms in the pharmaceutical industry use ABC? What is the
strategicadvantage?