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

Question

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

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

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

Explanation / Answer

Ans:

Quality control overhead cost to be assigned using Traditional product costing:

= $71500*17%=$12155

Quality control overhead cost to be assigned using Activity- based costing:

= $0.9*5500+0.33*10000+$12.00*440

= $4950+$3300+$5280

= $13530

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