Question

Urban Elite Cosmetics has used a traditional cost accounting system to apply quality-control costs uniformly to...

Urban Elite Cosmetics has used a traditional cost accounting system to apply quality-control costs uniformly to all products at a rate of 18 percent of direct-labor cost. Monthly direct-labor cost for Satin Sheen makeup is $111,000. In an attempt to more equitably distribute quality-control costs, management is considering activity-based costing. The monthly data shown in the following chart have been gathered for Satin Sheen makeup.

Activity Cost Pool Cost Driver Pool Rates Quantity of Driver
for Satin Sheen
Incoming material inspection Type of material $ 24.00 per type 26 types
In-process inspection Number of units 0.30 per unit 46,000 units
Product certification Per order 153.00 per order 55 orders


Required:
1.
Calculate the monthly quality-control cost to be assigned to the Satin Sheen product line under each of the following product-costing systems.
a. Traditional system, which assigns overhead on the basis of direct-labor cost.
b. Activity-based costing.
2. Does the traditional product-costing system overcost or undercost the Satin Sheen product line with respect to quality-control costs? By what amount?

2.

Redwood Company sells craft kits and supplies to retail outlets and through its catalog. Some of the items are manufactured by Redwood, while others are purchased for resale. For the products it manufactures, the company currently bases its selling prices on a product-costing system that accounts for direct material, direct labor, and the associated overhead costs. In addition to these product costs, Redwood incurs substantial selling costs, and Roger Jackson, controller, has suggested that these selling costs should be included in the product pricing structure.

After studying the costs incurred over the past two years for one of its products, skeins of knitting yarn, Jackson has selected four categories of selling costs and chosen cost drivers for each of these costs. The selling costs actually incurred during the past year and the cost drivers are as follows:

Cost Category Amount Cost Driver
Sales commissions $ 829,500 Boxes of yarn sold to retail stores
Catalogs 541,800 Catalogs distributed
Cost of catalog sales 211,500 Skeins sold through catalog
Credit and collection 108,000 Number of retail orders
Total selling costs $ 1,690,800


The knitting yarn is sold to retail outlets in boxes, each containing 12 skeins of yarn. The sale of partial boxes is not permitted. Commissions are paid on sales to retail outlets but not on catalog sales. The cost of catalog sales includes telephone costs and the wages of personnel who take the catalog orders. Jackson believes that the selling costs vary significantly with the size of the order. Order sizes are divided into three categories as follows:

Order Size Catalog Sales Retail Sales
Small 1–10 skeins 1–10 boxes
Medium 11–20 skeins 11–20 boxes
Large Over 20 skeins Over 20 boxes


An analysis of the previous year’s records produced the following statistics.

Order Size
Small Medium Large Total
Retail sales in boxes (12 skeins per box) 3,500 75,000 198,000 276,500
Catalog sales in skeins 99,000 72,000 64,000 235,000
Number of retail orders 685 3,415 7,900 12,000
Catalogs distributed 246,725 518,775 137,500 903,000


Required:
1.
Prepare a schedule showing Redwood Company’s total selling cost for each order size and the per-skein selling cost within each order size. (Round your intermediate calculations and unit cost per order to 2 decimal places.)




2. An analysis of selling costs shows: (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically graded as incorrect.)

  • Management may want to consider offering discounts for large orders.unanswered
  • Small orders are preferable to medium sized orders.unanswered
  • Large orders are preferable to medium sized orders.unanswered
  • Marketing should be focused on small sized orders.

3.

Jonathan Macintosh is a highly successful Pennsylvania orchardman who has formed his own company to produce and package applesauce. Apples can be stored for several months in cold storage, so applesauce production is relatively uniform throughout the year. The recently hired controller for the firm is about to apply the high-low method in estimating the company’s energy cost behavior. The following costs were incurred during the past 12 months:

Month Pints of Applesauce Produced Energy Cost
January 35,000 $ 23,400
February 21,000 22,100
March 22,000 22,000
April 24,000 22,450
May 30,000 22,900
June 32,000 23,350
July 40,000 28,000
August 30,000 22,800
September 30,000 23,000
October 28,000 22,700
November 41,000 24,100
December 39,000 24,950


Required:
1.
Use the high-low method to estimate the company’s energy cost behavior and express it in equation form. Use the formula Y = a + bX, where Y denotes energy cost for a month and X denotes pints of applesauce produced.
2. Predict the energy cost for a month in which 26,000 pints of applesauce are produced.


4.  

Rio Bus Tours has incurred the following bus maintenance costs during the recent tourist season. (The real is Brazil’s national monetary unit. On the day this exercise was written, the real was equivalent in value to 0.2545 U.S. dollar.)

Month Miles Traveled by Tour Buses Cost
November 8,500 11,400 real
December 10,600 11,600
January 12,700 11,700
February 15,000 12,000
March 20,000 12,500
April 8,000 11,000


Required:
1. Use the high-low method to estimate the variable cost per tour mile traveled and the fixed cost per month.
2. Develop a formula to express the cost behavior exhibited by the company’s maintenance cost.
3. Predict the level of maintenance cost that would be incurred during a month when 22,000 tour miles are driven.



Homework Answers

Answer #1

1.

a. Quality control cost assigned as per traditional system = $111,000 * 18% = $19,980

b. Quality control cost assigned as per activity-based costing method:

Incoming material inspection (26*$24) $624
In process inspection (46,000*$0.30) 13,800
Product certification (55*$153) 8,415
Total cost assigned $22,839

2. Traditional product costing system undercost the satin sheen product line with respect to quality control cost by $2,859 (22,839-19,980)

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