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    Budgeting and quality costs

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    A.) Jones, Inc. expects to sell 12,000 units.
    Each unit requires:

    4 pounds of direct material at $8 per pound
    1 direct labor hour at $10 per direct labor hour

    The manufacturing overhead rate is $8 per direct labor hour.

    The beginning inventories are as follows:

    Direct materials: 3,000 pounds
    Finished goods: 1,500 units

    The planned ending inventories are as follows:

    Direct materials: 6,000 pounds
    Finished goods: 2,000 units


    1. What is the planned production?

    2. What are the required direct material purchases for the planned production?

    B.)Brown Corporation produces ignition equipment and programs for small equipment manufacturers. One of the most important parts of the company's new just-in-time production process is quality control. Initially, a traditional cost accounting system was used to assign quality control costs to products. All of the costs of the Quality Control Department were included in the plant's overhead cost rate and allocated to products based on direct labor dollars. Recently, the firm implemented an activity-based costing system. The activities, cost drivers, and rates for the quality control function are summarized below, along with cost allocation information from the traditional system. Also shown is information related to one order of the Speedy line.
    Traditional Costing Approach:

    Quality control costs were assigned at a rate of 14% of direct labor dollars.

    Order Speedy 7:

    Charged with $15,000 of direct labor costs.

    Activity-Based Approach for the Quality Control Function:

    Cost Drivers
    Order Speedy 7
    Activity Usage

    Materials Inspection
    Type of
    material used
    $15.75 per
    type of
    10 types of material

    Number of
    $0.95 per
    600 products

    Tool and Gauge
    Number of
    per cell
    $7 per
    21 processes

    Per order
    $65 per order
    1 order


    1. Compute the quality control cost that would be assigned to the Ace order under both the traditional approach and the activity-based costing approach to cost assignment.

    2. What was the impact on the costs assigned to the Ace order as a result of shifting to the activity-based costing approach?

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    Solution Summary

    The solution explains some questions relating to preparation of budgets and costs of quality