Kragan Clothing Company manufactures its own designed and labeled sports attire and sells its products through catalog sales and retail outlets. While Kragan has for years used activity-based costing in its manufacturing activities, it has always used traditional costing in assigning its selling costs to its product lines. Selling costs have traditionally been assigned to Kragan's product lines at a rate of 70% of direct material costs. Its direct material costs for the month of March for Kragan's "high intensity" line of attire are $400,000. The company has decided to extend activity-based costing to its selling costs. Data relating to the "high intensity" line of products for the month of March are as follows.
| Activity Cost Pools |
|
Cost Drivers |
|
Overhead
Rate
|
|
Number of Cost Drivers
Used per Activity
|
| Sales commissions |
|
Dollar sales |
|
$0.05 |
per dollar sales |
|
$900,000 |
| Advertising-TV/Radio |
|
Minutes |
|
$300 |
per minute |
|
250 |
| Advertising-Newspaper |
|
Column inches |
|
$10 |
per column inch |
|
2,000 |
| Catalogs |
|
Catalogs mailed |
|
$2.50 |
per catalog |
|
60,000 |
| Cost of catalog sales |
|
Catalog orders |
|
$1 |
per catalog order |
|
9,000 |
| Credit and collection |
|
Dollar sales |
|
$0.03 |
per dollar sales |
|
$900,000 |
(a) Compute the selling costs to be assigned to the "high-intensity" line of attire for the month of March: (1) using the traditional product costing system (direct material cost is the cost driver), and (2) using activity-based costing.
(b) By what amount does the traditional product costing system undercost or overcost the "high-intensity" product line?