C) 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. The monthly direct labour cost for the satin sheet range

is $147000. 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:

E8.29

LO8.1

8.5

8.6

8.7

Activity

Activity driver

Cost per unit of activity driver

Quantity of activity driver

Incoming material inspection

In-process inspection

Product certification

Type of material

Number of units

Number of orders

$34.50 per type

$0.42 per unit

$216 per order

24 types

35000 Units

50 orders

Required:

1. Calculate the monthly quality control cost to be assigned to the satin sheet product line under each of the

following approaches:

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

(b) activity-based costing.

2

Does the traditional product costing system over cost or under cost the satin sheet product line with respect

to quality control costs? By what amount and why?