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Health ’R Us, Inc., uses a traditional product costing system to assign overhead costs uniformly to...

Health ’R Us, Inc., uses a traditional product costing system to assign overhead costs uniformly to all its packaged multigrain products. To meet Food and Drug Administration requirements and to assure its customers of safe, sanitary, and nutritious food, Health ’R Us engages in a high level of quality control. Health ’R Us 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 breakfast line is $65,000. In response to repeated requests from its financial vice president, Health ’R Us’s management agrees to adopt activity-based costing. Data relating to the low-calorie breakfast line for the month of June are as follows.

Activity Cost Pools	Cost Drivers	Overhead Rate		Number of Cost Drivers Used per Activity
Inspections of material received	Number of pounds	$0.90	per pound	5,500	pounds
In-process inspections	Number of servings	$0.33	per serving	9,500	servings
FDA certification	Customer orders	$12.00	per order	400	orders

(a)

Compute the quality-control overhead cost to be assigned to the low-calorie breakfast 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.

		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 breakfast line?

OvercostUndercost

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(c)

Classify each of the activities as value-added or non–value-added.

Activites
Inspections of material received		Non-value-addedValue-added
In-process inspections		Non-value-addedValue-added
FDA certification		Non-value-addedValue-added

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Expert Solution

Answer-a:

	Traditional product costing	Activity- based costing
Quality control overhead cost to be assigned	$ 11,050	$ 12,885

Working:
Traditional product costing:
Quality control overhead cost to be assigned ($65,000*17%)	$ 11,050

Activity-based costing:
Quality control overhead cost to be assigned
Inspections of material received (5,500*$0.90)	$ 4,950
In-process inspections (9,500*$0.33)	$ 3,135
FDA certification (400*$12)	$ 4,800
Quality control overhead cost to be assigned	$ 12,885

Answer-b:

Traditional product costing undercost by $1,835 ($12,885 - 11,050)

Answer-c:

Activity
Inspections of material received	Non-value-added
In-process inspections	Non-value-added
FDA certification	Non-value-added

ekkarill92 answered 1 year ago

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