Whitman Enterprises Uses a Traditional-Costing System to Estimate Quality-Control Costs

question 12

Essay

Whitman Enterprises uses a traditional-costing system to estimate quality-control costs for its Dragon product line. Costs are estimated at 32% of direct-labor cost, and direct labor totaled $860,000 for the quarter just ended. Management is contemplating a change to activity-based costing, and has established three cost pools: incoming material inspection, in-process inspection, and final product certification. Number of parts, number of units, and number of orders have been selected as the respective cost drivers.
The following data show the pool rates that have been calculated by the company along with the quantity of driver units for the Dragon's:

Required:
A. Calculate the quarterly quality-control cost that is allocated to the Dragon product line under Whitman's traditional-costing system.
B. Calculate the quarterly quality-control cost that is allocated to the Dragon product line if activity-based costing is used.
C. Does the traditional approach under- or overcost the product line? By what amount?

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Definitions:

Rate of Interest

The percentage of a sum of money charged for its use by a lender to a borrower for a particular period, key to understanding loan costs and investment returns.

Earned

A term referring to income or profits that have been generated as a result of business activities or investments.

Rate of Return

The profit or deficit incurred on an investment during a specific timeframe, represented as a proportion of the initial investment value.