Reference no: EM13580030

Healthy Products, Inc., uses a traditional product costing system to assign overhead costs uniformly to all products. To meet Food and Drug Administration requirements and to assure its customers of safe, sanitary, and nutritious food, Healthy engages in a high level of quality control. Healthy 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 dessert line is $61,800. In response to repeated requests from its financial vice president, Healthy's management agrees to adopt activity-based costing. Data relating to the low-calorie dessert line for the month of June are as follows.

Activity Cost Pools		Cost Drivers		Overhead Rate			Number of Cost Drivers Used per Activity
Inspections of material received		Number of pounds		$0.80	per pound		5,580	pounds
In-process inspections		Number of servings		$0.33	per serving		10,000	servings
FDA certification		Customer orders		$12.00	per order		410	orders

(a) Compute the quality-control overhead cost to be assigned to the low-calorie dessert 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
Quality-control overhead cost to be assigned		$		$

(b) By what amount does the traditional product costing system undercost or overcost the low-calorie dessert line?

$

OvercostUndercost