Activity-Based Costing: Cost Distortion 58. Academy Enterprises


Question Description:

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Dear sir/madam, I have a questions about Managerial accounting concerning with the Activity Based costing problems. This is the questions from your course Hero. I attached that question and also answer in the attachment file. What I don’t understand is in calculating the quarterly quality-control cost using ABC system, the given answer calculate the incoming inspection ($0.5*14*26,000=$182,000). Why 26000 multiple with those numbers. I thought it should be ($0.5*14= $7)? Questions.docx Activity-Based Costing: Cost Distortion 58. Academy Enterprises uses a traditional-costing system to estimate quality-control costs for its PDA product line. Costs are estimated at 32% of direct-labor cost, and direct labor totaled $548,000 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 application rates that have been calculated by the company along with the quantity of driver units for the PDAs: Cost Application Rate $ 0.50 per part 0.10 per unit 110.00 per order Driver Quantities 14 parts 26,000 units 80 orders Required: A. Calculate the quarterly quality-control cost that is allocated to the PDA product line under Academy‚Äôs traditional-costing system. B. Calculate the quarterly quality-control cost that is allocated to the PDAs if activity-based costing used. C. Does the traditional approach under- or overcost the product line? By how much? LO: 1, 4, 5 Type: A, N Answer: A. $548,000 x 32% = $175,360 B. Incoming inspection ($0.50 x 14 x 26,000 = $182,000) + in-process inspection (26,000 x $0.10 = $2,600) + final certification (80 x $110 = $8,800), which totals $193,400. C. Traditional costing undercosts the PDAs by $18,040 ($193,400 – $175,360).

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