Organic Products, Inc., uses a traditional product costing system to assign overhead costs uniformly to all products. To meet Food and Drug Administration (FDA) requirements and to assure its customers of safe, sanitary, and nutritious food, Organic engages in a high level of quality control. Organic assigns its quality-control overhead costs to all products at a rate of 20% of direct labor costs. Its direct labor cost for the month of June for its low-calorie dessert line is $55,000. In response to repeated requests from its financial vice president, Organic management agrees to adopt activity-based costing. Data relating to the low-calorie dessert line for the month of June are as follows.

Instructions

(a) Compute the quality-control overhead cost to be assigned to the low-calorie dessert product line for the month of June using 

(1) the traditional product costing system (direct labor cost is the cost driver),

(2) activity-based costing.

(b) By what amount does the traditional product costing system undercost or overcost the low-calorie dessert line?

(c) Classify each of the activities as value-added or non–value-added.

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Activity Cost Pools Inspections of material received In-process inspections FDA certification Cost Drivers Number of pounds Number of servings Customer orders Overhead Rate $ 0.70 per pound $ 0.35 per serving $13.00 per order Number of Cost Drivers Used per Activity 6,000 pounds 10,000 servings 450 orders