Question

Which of the following statements is (are) true regarding a company that has implemented flexible manufacturing systems and activity-based costing?
I. The company has erred, as these two practices used in conjunction with one another will severely limit the firm's ability to analyze costs over the relevant range.
II. Costs formerly viewed as fixed under traditional-costing systems may now be considered variable with respect to changes in cost drivers such as number of setups, number of material moves, and so forth.
III. As compared with the results obtained under a traditional-costing system, the concept of break-even analysis loses meaning.

		I only.
		II only.
		III only.
		I and II.
		II and III.

Answer 1

Solution:

II only

Explanation:

Traditional costing is the allocation of factory overhead to products based on the Quantity of resources consumed. Under this method, overhead is usually distributed based on either direct labor hours consumed or machine hours used. The problem with this system is that factory overhead may be much higher than the basis of allocation, so that a small change in the amount of resources consumed results in massive change in the amount of overhead allocated.

For example, a traditional costing calculation find that factory overhead should be charged to products @ $500 per machine hour, so if there is a slight change in the production process that increases machine hour by one hour, the cost of the product has just increased by $500 of overhead.

so to tackle this issue, Activity-based costing was developed with traditional costing, using a more detailed analysis of the relationship between overhead costs and cost drivers.

in context of above, the statement "Costs formerly viewed as fixed under traditional-costing systems may now be considered variable with respect to changes in cost drivers such as number of setups, number of material moves, and so forth" stands True.

Statement III stands wrong as there is no effect of traditional costing on the concept of Braek even Anylysis because total fixed cost remain same in both the cases.

In the same way, Statement I "The company has erred, as these two practices used in conjunction with one another will severely limit the firm's ability to analyze costs over the relevant range" stands wrong as there is no effect on firm's ability to anylyze cost. also the statement is not specific one as mention over the relevant range create confusion.