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Healthy Products

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Healthy Products, Inc., uses a traditional product costing system to assign overhead
costs uniformly to all products. To meet Food and Drug Administration requirements
and to assure its customers of safe, sanitary, and nutritious food, Healthy engages
in a high level of quality control. Healthy assigns its quality-control overhead costs to all
products at a rate of 17% of direct labor costs. Its direct labor cost for the month of June
for its low-calorie dessert line is $65,000. In response to repeated requests from its financial
vice president, Healthy’s management agrees to adopt activity-based costing. Data
relating to the low-calorie dessert line for the month of June are as follows.

Activity Cost pools  Cost Driver  Overhead Rate # of Cost Drivers
Inspections of Materials # of pounds  $0.80  6,000
In process inspections # of servings  $0.33  10,000
FDA certification Customer order  $12.00  420

(a) Compute the quality-control overhead cost to be assigned to the low-calorie dessert
product line for the month of June (1) using the traditional product costing system
(direct labor cost is the cost driver), and (2) using 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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