Question

XAF company is reviewing the behavior of its various activities. XAF is considering various costs. They are reviewing product costs of two products. Products S5 and S8 each are assigned $50.00 in indirect costs by a traditional costing system. An activity analysis revealed that although production requirements are identical, S5 requires 45 minutes less setup time than S8. According to an ABC system, S5 is __________ under the traditional system.

a. undercosted
b. overcosted
c. fairly costed
d. accurately costed
e. some other effect not listed here

Answer 1

According to an Activity-Based Costing (ABC) system, Product S5 is overcosted under a traditional costing system because it allocates the same indirect costs despite S5 requiring less setup time than Product S8. ABC more accurately allocates costs based on actual activity requirements.

Step-by-step explanation:

When it comes to calculating the appropriate cost of production, multiple methods exist, each with their own advantages and disadvantages. Traditional costing systems allocate indirect costs evenly across products without necessarily taking into account the actual activities and resources consumed by each product. This can lead to inaccuracies when products have different production requirements.

In contrast, Activity-Based Costing (ABC) is a more refined approach that assigns costs to products based on the specific activities they require. It takes into account the true cost drivers such as setup times, machine usage, and labor involved. In the scenario where Product S5 requires 45 minutes less setup time than Product S8, an ABC system would allocate less of the setup cost to S5 than to S8, reflecting the actual resources used by each product.

Under a traditional costing system, which doesn't distinguish between the two products' setup times, both S5 and S8 are assigned the same indirect costs. Given that S5 requires less setup time, it would be reasonable to allocate less of the setup costs to S5, which the ABC system recognizes.

Therefore, under a traditional system where this is not accounted for, Product S5 would be overcosted, since it is allocated more costs than it should have based on the resources it actually consumes. As such, the cost of production for S5 under a traditional system is not reflecting its actual cost behavior, leading to a potential misrepresentation of its profitability and manufacturing efficiency.

Note: The discussion above revolves around the principles of cost accounting and its real-world implications. Various factors, such as the construction of new facilities or government price controls, as mentioned in the given context, can further complicate the determination of production costs. These can impact decisions such as valuation of inventory, profitability analysis, and even international trade disputes concerning anti-dumping measures.