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Coronado, Inc. manufactures specialty toys. Trendy uses a traditional product costing system to assign overhead costs uniformly to all products. To meet industry safety standards and to assure its customers of safe and durable toys, Trendy assigns its quality-control overhead costs to all products at a rate of 23% of direct labor costs. Its direct labor cost for the month of August for its toddler line of toys is $331,000. In response to repeated requests from its financial vice president, Trendy’s management agrees to adopt activity-based costing. Data relating to the toddler line of toys for the month of August are as follows:

Activity Cost Pools Cost Drivers Overhead
Rate Number of Cost
Drivers Used
per Activity
Materials Inspection pounds Number of pounds $0.80 per pound 42,000
Assembly Line Inspection Number of finished toys $0.16 per toy 163,000 toys
National Toy Association Certification Retail orders $2.00 per order 800 orders
(a)
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Compute the quality-control overhead cost to be assigned to the toddler toy line for the month of August (1) using the traditional product costing system (direct labor is the cost driver), and (2) using activity-based costing.

Quality-Control Overhead Cost
Traditional costing $
76,130
Activity-based costing $
61,280
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Solution
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(b)
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By what amount does the traditional product costing system undercost or overcost the toddler toy line?

The traditional product costing system
undercost
overhead by $
14,850
.
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Solution
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(c)
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Classify each of the activities as value-added or not-value added.

Materials Inspection
Non-value added
Assembly Line Inspection
Non-value added
National Toy Association
Non-value added
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(d)
Trendy Toys is exploring options to help reduce overhead costs especially for non-value added activities. One of the proposals is from the National Toy Association. For an additional $1 per order, this entity could perform additional safety checks that would reduce the assembly line inspection costs by $0.01 per toy. Compute the overhead cost assigned to the toddler toy line for the month of August using activity-based costing under this proposal.

Overhead cost assigned $

Should Trendy Toys accept the National Toy Association’s offer?

Trendy Toys
accept this offer.

Sagot :

Anthougoid

a) The computation of the quality-control overhead cost to be assigned by Trendy Toys to the toddler toy line for August:

1) Using the traditional product costing system is $76,130 ($331,000 x 23%).

2) Using the activity-based costing system is $61,280 (42,000 x $0.80 + 163,000 x $0.16 + 800 x $2.00).

= ($33,600 + $26,080 + $1,600)

b) The traditional product costing system overcasts the overhead by $14,850 ($76,130 - $61,280) when compared with the activity-based system.

c) The classification of the activities as value-added or non-value-added is as follows:

Materials Inspection           Non-value added

Assembly Line Inspection  Non-value added

National Toy Association   Non-value added

What is a non-value-added activity?

A non-value-added activity is a production activity that does not increase the value of the product or service delivered to the customer.

Examples of non-value-added production activities undertaken by Trendy Toys are materials inspection, assembly-line inspection, and payment for the National Toy Association Certification.

d) Under the new proposal, the overhead cost assigned to the toddler toy line for August using activity-based costing is $60,450.

= $60,450 (42,000 x $0.80 + 163,000 x $0.15 + 800 x $3.00)

= $60,450 ($33,600 + $24,450 + $2,400)

e) Trendy Toys should accept the offer from National Toy Association because it reduces its overhead cost by $830 ($61,280 - $60,450).

Data and Calculations:

Quality control overhead costs rate = 23% of direct labor cost

Direct labor cost for August = $331,000

Activity Cost Pools      Cost Drivers         Overhead      Number of Cost

                                                                       Rate               Drivers Used

                                                                                               per Activity

Materials Inspection  Number of pounds $0.80 per pound 42,000pounds

Assembly Line           Inspection Number $0.16 per toy      163,000 toys

                                  of finished toys

National Toy              Retail orders           $2.00 per order        800 orders

Association

Certification

Thus, by accepting the National Toy Association's offer, Trendy Toys' overhead cost will be reduced by $830 under the activity-based costing system.

Learn more about the activity-based costing system at https://brainly.com/question/6654166

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