Question

Q2)

Micro Products, Inc., uses a traditional product costing system to assign overhead costs uniformly to all products. To meet Food and Drug Administration (FDA) requirements and to assure its customers of safe, sanitary, and nutritious food, Micro engages in a high level of quality control. Micro assigns its quality-control overhead costs to all products at a rate of 25% of direct labour costs. Its direct labour cost for the month of June for its dessert line is OMR60,000. In response to repeated requests from its financial vice president, Micromanagement agrees to adopt activity-based costing. Data relating to the dessert 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	0.60 OMR per pound	5,500 pounds
In-process inspections	Number of servings	0.40 OMR per serving	12,000 servings
FDA certification	Customer orders	15 OMR per order	550 orders

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

b. By what amount does the traditional product costing system under-cost or over-cost the dessert line?

Answer 1