Whitman Enterprises uses a traditional-costing system to estimate quality-contro
ID: 2535159 • Letter: W
Question
Whitman Enterprises uses a traditional-costing system to estimate quality-control costs for its Dragon product line. Costs are estimated at 55% of direct-labor cost, and direct labor totaled $878,000 for the quarter just ended. Management is contemplating a change to activity-based costing, and has established three cost pools: incoming material inspection, in-process inspection, and final product certification. Number of parts, number of units, and number of orders have been selected as the respective cost drivers.
The following data show the pool rates that have been calculated by the company along with the quantity of driver units for the Dragon’s:
Required:
Calculate the quarterly quality-control cost that is allocated to the Dragon product line under Whitman’s traditional-costing system.
Calculate the quarterly quality-control cost that is allocated to the Dragon product line if activity-based costing is used.
Does the traditional approach under- or overcost the product line? By what amount?
Pool Rate Driver Quantities $ 0.80 per part 21.8 parts 0.30 per unit 29,800 units 133.00 per order 108 ordersExplanation / Answer
Under Activity Based Costing, cost is calculated based on Actual driver quantities
Therefore,Quality control Cost = (21.8 parts*0.80 per part)+(29800 units*0.30 per unit) +(108 orders*133 per order) = 17.44 + 8940 + 14364 = 23321.44
So, Quality control cost under Activity based costing = $ 23321.44
Traditional approach overcost the product line by $ 459,578.56 (482900-23321.44)
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