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impact on unit cost of shifting to activity based costing

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Gayle Enterprises produces computer equipment and programs for heavy 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 company implemented an activity-based costing system. The activities, cost drivers, and rates for the quality control function are summarized below, along with the cost allocation information from the traditional system. Also shown is information related to one order of the Dimock Model computer. Compute
the quality control cost that would be assigned to the Dimock Model order under both the traditional approach and the activity-based costing approach to cost assignment. What was the impact on unit cost as a result of shifting to the activity-based costing approach?

Traditional Costing Approach:

Quality control costs were assigned at a rate of 6 percent of direct labor dollars. Order Ace 18 was charged with $22,500.00 of direct labor cost.

Data is attached

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Solution Summary

A classic. Computes cost for each method, showing computations and process (formulas in excel cells) and then discusses why costs changed.

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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