An ABC study by Peterson Company has revealed that, of the last year's total overhead cost, $50,000 represented the costs of maintaining supplies of purchased subassemblies. The activity driver chosen for these costs is the number of different subassemblies available from vendors. A total of 200 subassemblies were available last year, of which 6 are used exclusively in Product BB.
The company's existing cost system accumulates all overhead in a single cost pool and allocates it based on direct labor cost. Last year, overhead totaled $800,000, direct labor totaled $200,000 and Product BB used $40,000 of direct labor.
Required:
Considering only the costs of maintaining supplies of purchase subassemblies, calculate the existing cost system's direction and amount of distortion in the reported cost of Product BB.