Vitarex NRG has been using the traditional product costing approach to assign ov

Question

Vitarex NRG has been using the traditional product costing approach to assign overhead to all of its packaged vitamins. The company MUST follow FDA regulations and is also concemed with providing customers safe, sanitary, and beneficial vitamins. Consequently, Vitarex NRG engages in high quality control activities. Quality control overhead costs are assigned to products at a rate of 18% of direct labor costs. In October, the company's direct labor cost for its Daily Vitamins is $83,000. Management of Vitarex NRG has been requested by it CFO to adopt Activity Based Costing (ABC): Data related to its Daily Vitamins for the month of October follows below: Cost Drivers_ Overhead Rate uss Used Inspections of materials received In-process inspections FDA Certification Number of pounds Number of servings Customer orders S0.90 per pound S0,33 per serving $1200 per order 6,000 pounds 10,000 servings 420 orders INSTRUCTIONS Write a memo to the CFO that will indicate whether ABC is a better method of overhead allocation than the traditional for it Daily Vitamins. You should indicate the overhead cost to be assigned to the Daily Vitamins product line for the month of October based on the (1) traditional method and (2) ABC. Next, you should compare and contract the results of the two methods. Be very specifie in presenting your comparison Be sure S amounts are included. Show ALL relevant computations

Explanation / Answer

1 Traditional method Overhead cost 14940 (83000*18%) 2 ABC method Inspection of material received 5400 (6000*.9) In process inspection 3300 (10000*.33) FDA certification 5040 (12*420) Total overheads cost 13740 Overheads cost is applied to specific cost involved in ABC method This will decrease the total product cost by (14940-13740) 1200

Related Questions

Navigate

• Browse (All)
• Browse V
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.