E8.28 LO 8.5 8.6 Activity-based costing; quality control costs: manufacturer Stylish Manchester Ltd has used a traditional cost accounting system to apply quality control costs uniformly to all products at a rate of 16 per cent of direct labour cost. Monthly direct labour cost for the satin sheet range is $294 000. In an attempt to distribute quality control costs more equitably, Stylish Manchester is considering activity-based costing. The following data relates to monthly quality control costs for its satin sheet range:

Activity Incoming material inspection In-process inspection Product certification Required Activity driver Type of material Number of units Number of orders Cost per unit of activity driver

$69 per type

$0.84 per unit

$432 per order Quantity of activity driver 24 types 35 000 units 50 orders 2.

Calculate the monthly quality control cost to be assigned to the satin sheet product line under each of the following approaches:

(a) traditional system that assigns overhead on the basis of direct labour costs

(b) activity-based costing.

Does the traditional product costing system overcost or undercost the satin sheet product line with respect to quality control costs? By what amount and why?