Reference no: EM132655069

Problem - Trendy Toys & Games, Inc. manufactures specialty toys. Trendy uses a traditional product costing system to assign overhead costs uniformly to all products. To meet industry safety standards and to assure its customers of safe and durable toys, Trendy assigns its quality-control overhead costs to all products at a rate of 21% of direct labor costs. Its direct labor cost for the month of August for its toddler line of toys is $324,000. In response to repeated requests from its financial vice president, Trendy's management agrees to adopt activity-based costing. Data relating to the toddler line of toys for the month of August are as follows:

Activity Cost Pools	Cost Drivers	Overhead Rate	Number of Cost Drivers Used per Activity
Materials Inspection	Number of pounds	$0.70 per pound	50,000 pounds
Assembly Line Inspection	Number of finished toys	$0.15 per toy	190,000 toys
National Toy Association Certification	Retail orders	$2.00 per order	800 orders

Instructions -

(a) Compute the quality-control overhead cost to be assigned to the toddler toy line for the month of August (1) using the traditional product costing system (direct labor is the cost driver), and (2) using activity-based costing.

(b) By what amount does the traditional product costing system undercost or overcost the toddler toy line?

(c) Classify each of the activities as value-added or not-value added.

(d) Trendy Toys is exploring options to help reduce overhead costs especially for non-value added activities. One of the proposals is from the National Toy Association. For an additional $1 per order, this entity could perform additional safety checks that would reduce the assembly line inspection costs by $.01 per toy. Compute the overhead cost assigned to the toddler toy line for the month of August using activity-based costing under this proposal. Should Trendy Toys accept the National Toy Association's offer?