Problem: Activity-Based Costing: Cost Distortion
Academy Enterprises uses a traditional-costing system to estimate quality-control costs for its PDA product line. Costs are estimated at 32% of direct-labor cost, and direct labor totaled $548,000 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 application rates that have been calculated by the company along with the quantity of driver units for the PDAs:
|
Cost Application Rate
|
Driver Quantities
|
|
$0.50 per part
|
14 parts
|
|
0.10 per unit
|
26,000 units
|
|
110.00 per order
|
80 orders
|
Required:
A. Calculate the quarterly quality-control cost that is allocated to the PDA product line under Academy's traditional-costing system.
B. Calculate the quarterly quality-control cost that is allocated to the PDAs if activity-based costing used.
C. Does the traditional approach under- or overcost the product line? By how much?