McNair Company uses a traditional volume-based system for allocating overhead to products. Materials-related overhead costs are accumulated in a separate cost pool and allocated based on direct materials cost. Last year, materials-related overhead totaled $1,200,000 and direct materials costs totaled $3,000,000. Product AA used $15,000 of direct materials last year.
An ABC study has revealed that materials-related overhead costs are driven by materials requisitions. Last year, a total of 40,000 materials requisitions were processed, of which 40 were for Product AA.
Required:
With respect to materials-related overhead only, calculate the traditional cost system's direction and amount of cost distortion for product AA.