Case Scenario:
Rainbow Spray Paints, Inc. has used a traditional cost accounting system to apply quality-control costs uniformly to all products at a rate of 16 percent of direct-labor cost. Monthly direct-labor cost for the enamel paint line is $98,000. In an attempt to more equitably distribute quality-control costs, Rainbow is considering activity-based costing. The monthly data shown in the following chart have been gathered for the enamel paint line.
Activity Cost Pool Cost Driver Pool Rates Quantity of Driver
Incoming material inspection Type of material $23/type 24 types
In-process inspection Number of units 0.28/unit 35,000 units
Product certification Per order 144,000/order 50 orders
Required to do:
Problem 1. Calculate the monthly quality-control cost to be assigned to the enamel paint line under each of the following product-costing systems.
a. Traditional system which assigns overhead on the basis of direct-labor cost.
b. Activity-based costing.
Problem 2. Does the traditional product-costing system overcost or undercost the enamel paint line with respect to quality-control costs? By what amount?