Question

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.

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)