*Exercise 16-11

Health R Us, Inc., uses a traditional product costing system to assign overhead costs uniformly to all its packaged multigrain products. To meet Food and Drug Administration requirements and to assure its customers of safe, sanitary, and nutritious food, Health R Us engages in a high level of quality control. Health R Us assigns its quality-control overhead costs to all products at a rate of 17% of direct labor costs. Its direct labor cost for the month of June for its low-calorie breakfast line is $74,000. In response to repeated requests from its financial vice president, Health R Uss management agrees to adopt activity-based costing. Data relating to the low-calorie breakfast line for the month of June are as follows.

Activity Cost Pools		Cost Drivers		Overhead Rate			Number of Cost Drivers Used per Activity
Inspections of material received		Number of pounds		$0.90	per pound		5,500	pounds
In-process inspections		Number of servings		$0.33	per serving		10,700	servings
FDA certification		Customer orders		$12.00	per order		430	orders

Compute the quality-control overhead cost to be assigned to the low-calorie breakfast product line for the month of June (1) using the traditional product costing system (direct labor cost is the cost driver), and (2) using activity-based costing.

		Traditional product costing		Activity-based costing
Quality-control overhead cost to be assigned		$		$

By what amount does the traditional product costing system undercost or overcost the low-calorie breakfast line?

$

OvercostUndercost

Classify each of the activities as value-added or nonvalue-added.

Activites
Inspections of material received		Non-value-addedValue-added
In-process inspections		Non-value-addedValue-added
FDA certification		Non-value-addedValue-added

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