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Accounting: traditional cost and activity-based costing

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Bush Company 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 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 Ace computer line.

Traditional Costing Approach:

Quality control costs were assigned at a rate of 7% of direct labor dollars.

Order Ace 18:

Charged with $20,500 of direct labor costs.

Activity-Based Approach for the Quality Control Function:


Cost Drivers


Order Ace 18
Activity Usage

Materials Inspection

Type of
material used

$14.75 per
type of

12 types of material


Number of

$1.00 per

700 products

Tool and Gauge

Number of
per cell

$8 per

20 processes


Per order

$70 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 problem set deals with comparing traditional costing against activity based costing technique.

Solution provided by:
  • B. Sc., University of Nigeria
  • M. Sc., London South Bank University
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