Problem:
Doggi Chew Company uses a traditional product costing system to assign overhead costs uniformly to all products. To meet government regulations and to assure dogs of safe, sanitary, and nutritious food, Doggi Chew engages in quality control. Doggi Chew assigns its quality-control overhead costs to all products at a rate of 15% of direct-labor costs. Its direct-labor cost for the month of February for its puppy food product line is $30,000. Doggi Chew is going to change its costing method to activity-based costing. Data relating to the puppy food line for the month of February is as follows:
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Number of
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Cost Drivers
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Activity Cost Pool
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Cost Driver
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Overhead Rate
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Used
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In-house inspection
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Number of pounds
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$0.24 per pound
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12,500 pounds
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Government inspection
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Number of servings
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$0.05 per serving
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1,000 servings
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Certification
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Customer orders
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$0.32 per order
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550 orders
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Instructions
(a) Compute the quality-control overhead cost to be assigned to the puppy food product line for the month of February; (1) using the traditional product costing system (direct labor cost is the cost driver), and (2) using activity-based costing.
(b) By what amount does the traditional product costing system undercost or overcost the puppy food product line?
(c) Classify each of the activities as value-added or non-value-added.
(d) For each activity, identify the activity level as unit, batch, product or facility level.