Question

Urban Elite Cosmetics has used a traditional cost accounting system to apply quality-control costs uniformly to all products at a rate of 15 percent of direct-labor cost. Monthly direct-labor cost for Satin Sheen makeup is $96,000. 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	Cost Driver	Pool Rates			Quantity of Driver for Satin Sheen
Incoming material inspection	Type of material	$	21.00	per type		21	types
In-process inspection	Number of units		0.23	per unit		31,000	units
Product certification	Per order		142.00	per order		60	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

1. a. Quality-control cost to be assigned = Direct labor cost x 15%

= $96,000 x 15% = $14,400

b.

Activity cost pool	Pool rates (A)	Quantity of driver (B)	Cost assigned (A*B)
Income material inspection	$21	21	$441
In process inspection	0.23	31000	7130
Product certification	142	60	8520
Total cost assigned			$16091

2. Traditional product-costing system undercost = 16091 - 14400 = $1,691