Health ’ S 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 ’ S Us engages in a high level of quality control. Health ’ S 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 $ 67,000. In response to repeated requests from its financial vice president, Health ’ S 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 Inspections of material received Number of pounds $0.90 per pound 6,100 pounds In-process inspections Number of servings $0.33 per serving 10,200 servings FDA certification Customer orders $12.00 per order 500 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.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Health ’ S 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 ’ S Us engages in a high level of quality control. Health ’ S 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 $ 67,000. In response to repeated requests from its financial vice president, Health ’ S 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
Inspections of material received	Number of pounds	$0.90	per pound		6,100	pounds
In-process inspections	Number of servings	$0.33	per serving		10,200	servings
FDA certification	Customer orders	$12.00	per order		500	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.