Question

Vanguilder combines all manufacturing overhead into a single cost pool and allocates this overhead to products by using machine hours. Activity-based costing would likely show that with Vanguard's current procedures that:
all of the company's products are undercosted.

the company's high-volume products are undercosted.

all of the company's products are overcosted.

the company's high-volume products are overcosted.

the company's low-volume products are overcosted.

Answer 1

Answer:

The company's high-volume products are overcosted.

Explanation:

Vanguilder is currently using a traditional costing which is easy because it often just divides some types of costs equally between different items.

To understand this we take the assumption given in the question that Vanguilder combines all manufacturing overhead into a single cost pool and allocates this overhead to products by using machine hours.

So, lets say that Vanguilder is producing 2 products then how will you divide the machine hours between these 2 products?

It's Easy;

The total cost of machine hours divided by units produced and we get the $ amount for each product. But what if product 1 uses more machine hours then product 2?

Is it still fair to write down same amount of machine hours for each product.

We should write bigger machine hour cost for the product 1, right?

This is where Activity Based Costing is different from Traditional Costing.

However, Activity Based Costing finds ways to divide or allocate these costs more proportionally or fairly.

We can write a higher cost for product which use more machine hours.

Hence the following option would be correct:

The company's high-volume products are overcosted.

As, low-volume products require less production allocated using overhead (such as machine hours) than high-volume products. Therefore low-volume product are  undercosted, while high-volume product are overcosted.