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

question 39

Essay

Weston Enterprises uses a traditional-costing system to estimate quality-control costs for its PDA product line. Costs are estimated at 32% of direct-labour cost, and direct labour totalled $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 PDAs: $\begin{array}{ll}&\underline { \text { Driver Quantities } }\\\underline {\text { Pool Rate }} \\\$ 0.50 \text { per part } & 20 \text { parts } \\0.12 \text { per unit } & 28,000 \text { units } \\115.00 \text { per order } & 90 \text { orders }\end{array}$ Required:
A. Calculate the quarterly quality-control cost that is allocated to the PDA product line under Weston's traditional-costing system.
B. Calculate the quarterly quality-control cost that is allocated to the PDAs if activity-based costing is used.
C. Does the traditional approach undercost or overcost the product line? By how much?

---

Definitions:

Fixed Costs

Expenses that do not vary with the level of production or sales, such as rent, salaries, and insurance.

Variable Cost

Financial obligations that adjust directly based on the level of produced goods or services.

Peak-period Requirements

The heightened capacity and resource needs of a business or system during its busiest or most active times.

Equipment Services Department

A division within a company that is responsible for the maintenance, repair, and management of physical assets and equipment.