Question

What is generally true about overhead allocation to high-volume products versus low-volume products under a traditional costing system?

Answer 1

The low-volume products generally require more special treatment and handling in form of machine setups and inspections. For the same reason, more overhead costs per unit is allocated to the low-volume product than a high-volume product. Thus, the allocation of overhead on the basis of ABC will normally increase the cost per unit for low- volume products as compared to a traditional overhead allocation. On the other hand, under a traditional costing system the overhead allocation will be more to high- volume products than the low volume products because under a tratraditio costing system allocation is done only the basis of direct labor hours and more labour hours are devoted to the high volume products. Therefore, traditional cost drivers such as direct labor hours are not considered appropriate for assigning overhead costs to low-volume products.

Under a traditional costing system the overhead allocation will be high to high- volume products than the low volume products. This is because more labour hrs will be devoted to the high volume products.