Question

If management wants the most accurate product cost, which of the following costing methods should be used? a. Volume-based costing using departmental overhead rates. b. Normal costing using a plantwide overhead rate. c. Activity-based costing. d. Volume-based costing using a plantwide overhead rate. 2. Which costing method tends to overstate the cost of high-volume products? a. Traditional volume-based costing. b. Activity-based costing. c. Job order costing. d. Differential costing. 3. Disadvantages of activity-based costing includea. It is not acceptable under GAAP for external reporting. b. It can be costly to implement. c. It can be used in activity-based management. d. It is not acceptable under GAAP for external reporting and it can be costly to implement.

Answer 1

1. If management wants the most accurate product cost, which of the following costing methods should be used?

Answer:

c. Activity-based costing

Explanation:

In activity based costing, You only assign cost to a certain products and services based on your actual consumption. This will include indirect cost that might be overlooked by other from of costing methods.

For example, other type of costing might only account the total material or price of the machines when calculating the total cost of creating product. As a matter of fact, this will undervalue the total cost.

You need to calculate the expense that is not directly involved in the production but still necessary for the operation (such as the cost of fixing broken parts,  the cost of daily maintenance, etc). All of these things will be included in activity-based costing.

2. Which costing method tends to overstate the cost of high-volume products?

Answer:

A. traditional volume based accounting

Explanation

Traditional volume based costing  will calculate all overhead costs (such as salary paid per hour to employees)  and include it to the overall cost of the production without any additional adjustment.

This will cause an overstate in the cost of high-volume products Because longer hours of work does not necessarily translate to proportionate increase in productivity.,

3. Disadvantages of activity-based costing include

Answer:

-It is not acceptable under GAAP for external reporting.

-It can be costly to implement.

Explanation:

GAAP does not accept activity-based costing becasue it overlooked  Organization-sustaining costs that will exist regardless of how much goods the company produce. (For example  Cost of factory security, Cost of electricity for heating and air conditioning and  office administration rent).

Activity based costing can be costly because it need a more precise evaluation of their indirect cost. Which means that they need to hire more experts to specifically pay attention to indirect cost which often time untraceable by common employees.