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In: Accounting

*Exercise 16-11 Health ’R Us, Inc., uses a traditional product costing system to assign overhead costs...

*Exercise 16-11

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 $74,000. 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 10,700 servings
FDA certification Customer orders $12.00 per order 430 orders
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 $ $
By what amount does the traditional product costing system undercost or overcost the low-calorie breakfast line?
$

OvercostUndercost

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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Solutions

Expert Solution

Traditional Costing
Quality-Control overhead cost assigned to low-calorie overhead cost =$74,000*17% =$12,580
Activity-Based Costing
Low-calorie Breakfast line
Activity Rate Activity Driver OH allocated
Inspection of material received $0.90                                             5,500 $4,950
In-Process Inspection $0.33                                           10,700 $3,531
FDA Certification $12.00                                                430 $5,160
Quality-Control overhead cost assigned to low-calorie overhead cost $13,641
Traditional costing system has undercosted the cost by $1,061($13,641-$12,580) when compared to Activity-Based costing
Inspection of material received Non-Value added
In-Process Inspection Non-Value added
FDA Certification Non-Value added

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