Activities and Activity-Based CostingZone Enterprises produces wireless components used in

Activities and Activity-Based Costing

Zone Enterprises produces wireless components used in telecommunications equipment. One of the most important features of the company’s new just-in-time production process is quality control. Initially, a traditional allocation method was used to assign the costs of quality control to products; all these costs were included in the plant’s overhead cost pool and allocated to products based on direct labor dollars. Recently, the firm has implemented an activity-based costing system. The activities, cost drivers, and rates for the quality control function are summarized below, along with cost allocation information from the traditional method. Also shown is information related to one order, Order HL14. Compute the quality control cost that would be assigned to the order under both the traditional method and the activity-based costing method.

Traditional costing method:

Quality control costs were assigned at a rate of 12 percent of direct labor dollars. Order HL14 was charged with $9,350 of direct labor costs.

Activity-based costing method:     

Activity Usage   

for Cost Rate 

Activity 

$17.50 per type of

17 types of materials

Incoming materials

Types of materials used

material used 

inspection 

$.06 per product

2,400 products

In-process inspection

Number of products

$26.50 per process

11 processes

Tool and gauge control

Number of processes per cell

per cell 

Product certification

Per order

$94.00 per order

1 order

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