Question

Whitman Enterprises uses a traditional-costing system to estimate quality-control costs for its Dragon product line. Costs are estimated at 50% of direct-labor cost, and direct labor totaled $868,000 for the quarter just ended. Management is contemplating a change to activity-based costing, and has established three cost pools: incoming material inspection, in-process inspection, and final product certification. Number of parts, number of units, and number of orders have been selected as the respective cost drivers.

The following data show the pool rates that have been calculated by the company along with the quantity of driver units for the Dragon’s:

Pool Rate				Driver Quantities
$	0.80	per part			599,040	parts
	0.20	per unit			28,800	units
	123.00	per order			98	orders

Required:

1. Calculate the quarterly quality-control cost that is allocated to the Dragon product line under Whitman’s traditional-costing system.
2. Calculate the quarterly quality-control cost that is allocated to the Dragon product line if activity-based costing is used.
3. Does the traditional approach under- or overcost the product line? By what amount?

A B. Quality control cost Quality control cost C.

Answer 1

Ans:

A.

Quarterly Quality-Control Cost = 50% of direct labor cost (868,000) = $434,000

B.

Part B:

Quarterly Quality-Control Cost = Incoming inspection (599040 x 0.80)+ In-process inspection (28800 x 0.20 ) + Final certification (123 x 98)

= (599040 x 0.80)+ (28800 x 0.20 ) + (123 x 98)

= $497046

C.

Cost in part A i.e. traditional method is under cost as it is lower.

Under cost (497046-434000) = $63046