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When activity-based costing is used, why do manufacturing overhead costs often shift from high-volume products to...

When activity-based costing is used, why do manufacturing overhead costs often shift from high-volume products to low-volume products?

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Expert Solution

  • In what fundamental ways does activity-based costing differ from traditional costing methods such as:

Activity-based costing differs from traditional costing methods in 3 ways:
·      Non-manufacturing as well as manufacturing costs may be assigned to products, but only on a cause-and-effect basis.
·      Some manufacturing costs may be excluded from product costs.
·      Numerous overhead costs pools are used, each of which is allocated to products and other cost objects using it’s own unique measure of activity.

  • Why are there two stages of allocation in activity-based costing?

There are two stages of allocation in activity-based costing because costs must first be allocated to activity cost pools and then they are allocated from the activity cost pools to products, customers, and other cost objects.

  • When activity-based costing is used, why do manufacturing overhead costs often shift from high-volume products to low-volume products?

When activity-based costing is used, manufacturing overhead costs shift from high-volume products to low-volume products because in traditional cost systems, product-level costs are spread across all products using direct labor-hours or some other allocation base related to volume. As a consequence, high-volume products are assigned the bulk of such costs. In an activity-based costing system, batch-level and product-level costs are assigned more appropriately. This results in shifting product-level costs back to the products that cause them and away from the high-volume products.

  • What types of costs should not be assigned to products in an activity-based costing system?

The types of costs that should not be assigned to products in an activity-based costing system are: organization-sustaining costs and customer level costs.  Costs of idle capacity should not be assigned to products, these costs represent resources that are not consumed by the products.   Activity based costing treats these types of costs as period expenses rather than product costs

ekkarill92 answered 1 year ago
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