Question

Urban Elite Cosmetics has used a traditional cost accounting system to apply quality-control costs uniformly to all products at a rate of 16 percent of direct-labor cost. Monthly direct-labor cost for Satin Sheen makeup is $97,000. 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	$	22.00	per type		22	types
In-process inspection	Number of units		0.24	per unit		32,000	units
Product certification	Per order		144.00	per order		65	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?

Calculate the monthly quality-control cost to be assigned to the Satin Sheen product line under the Traditional product-costing system and the Activity-based product-costing system.

	Assigned Cost a. Traditional system b. Activity-based costing

Does the traditional product-costing system overcost or undercost the Satin Sheen product line with respect to quality-control costs? By what amount?

	Traditional system by

Answer 1

Answer :

( 1 )

		Assigned Cost
a	Traditional system	$ 15520
b	Activity-based costing.	$ 17524

(a)   monthly quality-control cost to be assigned to the Satin Sheen product line under  Traditional system

= Monthly Direct Labor cost *16 %

= $ 97000 * 16 %

= $ 15520

(b) monthly quality-control cost to be assigned to the Satin Sheen product line under  Activity-based costing.

Activity	Rates (a)	Quantity (b)	Assigned Cost (a)* (b)
Incoming Material Inspection	$ 22 per type	22	$ 484
In process Inspection	$ 0.24 per unit	32000 unit	$ 7680
Product Certification	$ 144 per order	65 order	$ 9360
		Total	$ 17524

2.

Traditional costing system undercost the  Satin Sheen product line by $ 2004 ( $ 17524- $ 15520 ) .