Question

Aqua Company produces two products−Alpha and Beta. Alpha has a high market share and is produced in bulk. Production of Beta is based on customer orders and is custom designed.​ Also, 55% of​ Beta's cost is shared between design and setup​ costs, while​ Alpha's major portions of costs are direct costs. Alpha is using a single cost pool to allocate indirect costs. Which of the following statements is true of​ Aqua?
A. Aqua will overcost Beta's direct costs as it is using a single cost pool to allocate indirect costs.
B. Aqua will undercost Alpha's indirect costs because alpha has high direct costs.
C. Aqua will overcost Alpha's indirect costs as it is using a single cost pool to allocate indirect costs.
D. Aqua will overcost Beta's indirect costs because beta has high indirect costs.

Answer 1

Answer: C. Aqua will overcost Alpha's indirect costs as it is using a single cost pool to allocate indirect costs.

Explanation:

Aqua is using a single cost pool to allocate indirect costs which means that the indirect costs of both Alpha and Beta will be included in this cost pool.

This will overcost Alpha because Alpha only has minor portions of indirect costs while Beta has significant indirect costs. Putting both products together means that a lot of indirect costs assigned to Alpha will be from Beta which would mean that Alpha is overcosted.