Question

Urban Elite Cosmetics has used a traditional cost accounting system to apply quality-control costs uniformly to all products at a rate of 14.5 percent of direct-labor cost. Monthly direct-labor cost for Satin Sheen makeup is $27,500. In an attempt to more equitably distribute quality-control costs, management is considering activity-based costing. The monthly data shown in the following chart have been gathered for Satin Sheen makeup. Activity Cost Pool Incoming material inspection In-process inspection Product certification Cost Driver Type of material Number of units Per order Pool Rates $11.50 per type 0.14 per unit 77.00 per order Quantity of Driver for Satin Sheen 12 types 17,500 units 25 orders Required: 1. Calculate the monthly quality-control cost to be assigned to the Satin Sheen product line under each of the following product- costing systems. a. Traditional system, which assigns overhead on the basis of direct-labor cost. b. Activity-based costing. 2. Does the traditional product-costing system overcost or undercost the Satin Sheen product line with respect to quality-control costs? By what amount?

Answer 1

Requirement 1(a): Traditional System which assigns overhead on basis of direct labour cost Monthly Quality control cost : 14.5% * $27,500 3,987.50 3,988 Round off $ Requirement 1(b): Activity - based Costing Activity Cost pool Incoming material inspection In process inspection Product certification Cost driver Type of material No of units Per order Pool rates(A) Quantity of driver for satin sheen(B) Total(AxB) $11.50 12 $138.00 $0.14 17500 $2,450.00 $77 25 $1,925.00 $4,513.00 Requirement 2: Traditional system Undercost by $526 ($4513-$3988)