In: Accounting
*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.
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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.
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By what amount does the traditional product costing system
undercost or overcost the low-calorie breakfast line?
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Classify each of the activities as value-added or
non–value-added.
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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 | ||