Eiko Inoue is the controller of Kato, Inc., an electronic controls company located in Osaka. She recently attended a seminar on activity-based costing (ABC) in Tokyo. Kato's traditional cost accounting system has three cost categories: direct materials, direct labor, and indirect production costs. The company allocates indirect production costs on the basis of direct-labor cost. The following is the 20X0 budget for the automotive controls department (in thousands of Japanese yen): (Click the icon to view the 20X0 budget.) i Data Table Direct materials Direct labor Indirect production costs 60,000 53,450 26,725 140,175 Total cost Print Done After Ms. Inoue attended the seminar, she suggested that Kato experiment with an ABC system in the Automotive Controls Department. She identified four main activities that cause indirect production costs in the department and selected a cost driver to use as a cost-allocation base for each activity as follows: (Click the icon to view the ABC data.) In 20X0 the Automotive Controls Department expects to produce 92,000 control units, use 590 quality control hours, and ship 8,500 boxes. Read the requirements. i Data Table Activity Cost-Allocation Base Receiving Direct materials cost Assembly Number of control units Quality control QC hours Shipping Number of boxes shipped Predicted 20X0 Cost (4000) 7,200 13,800 1,475 4,250 TOTAL 26,725 1. Explain how Kato, Inc., allocates its indirect production costs using its traditional cost system. Include a computation of the allocation rate used. 2. Explain how Kato, Inc., would allocate indirect production costs under Ms. Inoue's proposed ABC system. Include a computation of all the allocation rates used. 3. Suppose Kato prices its products at 15% above total production cost. An order came in from Toyota for 10,000 control units. Inoue estimates that filling the order will require 3,500,000 of direct-materials cost and 1,600,000 of direct labor. It will require 55 hours of QC inspection time and will be shipped in 700 boxes. a. Compute the price charged for the 10,000 control units if Kato uses its traditional cost accounting system. b. Compute the price charged for the 10,000 control units if Kato uses the ABC system proposed by Ms. Inoue. 4. Explain why costs are different in the two costing systems. Include an indication of which costs you think are most accurate and why. Requirement 1. Explain how Kato, Inc., allocates its indirect production costs using its traditional cost system. Include a computation of the allocation rate used. The traditional cost system allocates indirect production costs Requirement 1. Explain how Kato, Inc., allocates its indirect production costs using its traditional cost system. Include a computation of the allocation rate used. The traditional cost system allocates indirect production costs based entirely on assembly costs. based entirely on direct labor cost. based entirely on direct material cost. based entirely on quality control costs. based entirely on receiving costs. based entirely on shipping costs. separately for each activity