Health ’R 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 ’R Us engages in a high level of quality control. Health ’R 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 $68,000. In response to repeated requests from its financial vice president, Health ’R 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 OverheadRate Number of Cost DriversUsed per ActivityInspections of material received Number of pounds $0.90 per pound 6,200 poundsIn-process inspections Number of servings $0.33 per serving 9,900 servingsFDA certification Customer orders $12.00 per order 430 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. Traditional product costing Activity-based costingQuality-control overhead cost to be assigned $ $ By what amount does the traditional product costing system undercost or overcost the low-calorie breakfast line?$ Classify each of the activities as value-added or non–value-added.Activites Inspections of material received In-process inspections FDA certification

Solution Concept Under traditional costing system the overhead is allocated using a single overhead…

Answered: uality-control overhead cost to be…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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Health ’R 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 ’R Us engages in a high level of quality control. Health ’R 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 $68,000. In response to repeated requests from its financial vice president, Health ’R 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		6,200	pounds
In-process inspections	Number of servings	$0.33	per serving		9,900	servings
FDA certification	Customer orders	$12.00	per order		430	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.

		Traditional product costing		Activity-based costing
Quality-control overhead cost to be assigned		$		$

By what amount does the traditional product costing system undercost or overcost the low-calorie breakfast line?

Classify each of the activities as value-added or non–value-added.

Activites
Inspections of material received
In-process inspections
FDA certification

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