Problem:
1. Swagg Jewelry Corporation manufactures custom jewelry. In the past, Swagg has been using a traditional overhead allocation system based solely on direct labor hours.
Sensing that this system was distorting costs and selling prices, Swagg has decided to switch to an activity-based costing system using three activity cost pools. Information on these activity cost pools are as follows:
|
Activity Cost Pool
|
Estimated Activity
|
Estimated Overhead Cost
|
|
Labor related
|
8,000
|
direct labor hours
|
$40,000
|
|
Machine related
|
12,500
|
machine hours
|
$50,000
|
|
Quality control
|
800
|
number of inspections
|
$12,000
|
Job #309 incurred $900 of direct material, 30 hours of direct labor at $40 per hour, 80 machine hours, and 5 inspections.
Required:
a. What is the cost of the job under the activity-based costing system?
b. Relative to the activity-based costing system, would Job #309 have been overcosted or undercosted under the traditional system and by how much?