Healthy Products, Inc., uses a traditional product costing system to assign overhead costs uniformly to all products. To meet Food and Drug Administration requirements and to assure its customers of safe, sanitary, and nutritious food, Healthy engages in a high level of quality control. Healthy assigns its quality-control overhead costs to all products at a rate of 17% of direct labor costs. Its direct labor cost for the month of June for its low-calorie dessert line is $61,800. In response to repeated requests from its financial vice president, Healthy's management agrees to adopt activity-based costing. Data relating to the low-calorie dessert line for the month of June are as follows.
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Activity Cost Pools
|
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Cost Drivers
|
|
Overhead
Rate
|
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Number of Cost Drivers
Used per Activity
|
| Inspections of material received |
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Number of pounds |
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$0.80 |
per pound |
|
5,580 |
pounds |
| In-process inspections |
|
Number of servings |
|
$0.33 |
per serving |
|
10,000 |
servings |
| FDA certification |
|
Customer orders |
|
$12.00 |
per order |
|
410 |
orders |
(a) Compute the quality-control overhead cost to be assigned to the low-calorie dessert product line for the month of June: (1) using the traditional product costing system (direct labor cost is the cost driver), and (2) using activity-based costing.
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Traditional product costing
|
|
Activity-based costing
|
| Quality-control overhead cost to be assigned |
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$
|
|
$
|
(b) By what amount does the traditional product costing system undercost or overcost the low-calorie dessert line?
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$
|
|
OvercostUndercost |