Management accounting information

Natural Cosmetics Ltd (NCL) has used a conventional cost accounting system to apply quality control costs uniformly to all products at a rate of 16 per cent of direct labor cost. Monthly direct labor cost for Satin Sheen make-up is $98 000. In an attempt to distribute quality control costs more equitably, NCL is considering activity-based costing. The data on the following page relates to monthly quality control costs for Satin Sheen make-up:

 

Activity Cost Driver Per unit of activity driver Quantity of activity driver for enamel paint
Incoming material inspection Type of material $23 per type 24 types
In-process inspection Number of units $0.28 per unit 35000 units
Product certification Pre-order $144 per order 50 orders

 

Required:

  1. Calculate the monthly quality control cost to be assigned to the Satin Sheen product line under each of the following approaches:

(a). Conventional system which assigns overhead on the basis of direct labor costs.

(b). Activity-based costing.

  1. Does the conventional product costing system over cost or under cost the Satin Sheen product line with respect to quality-control costs? By what amount and why?

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