Question

Steps of Traditional Costing System using two-stage allocation process

A. Identify cost drivers and allocate costs to activities.

B. Allocate overhead costs to cost pools based on volume and then allocate to products based on cost drivers.

C. Skip the allocation process and directly assign overhead costs to products.

D. Use a single cost pool for all overhead costs.

Answer 1

In Traditional Costing, costs are allocated in a two-stage process: first to activities based on cost drivers, then overhead costs are allocated to cost pools by volume and further distributed to products. This method ensures accurate product costing, unlike skipping allocation or oversimplifying with a single cost pool.

Step-by-step explanation:

The steps of a Traditional Costing System using a two-stage allocation process involve several important stages. Firstly, the cost structure for the firm is determined by breaking down costs into fixed and variable components. Total cost, average variable cost, average total cost, and marginal cost calculations are made by following the formulas provided in specialized business and accounting texts.

In the first stage of Traditional Costing, costs are allocated to activities based on identified cost drivers. Then, in the second stage, overhead costs are allocated to cost pools according to the volume. Following this allocation to cost pools, the costs are then distributed to products based on the previously determined cost drivers. It's important to note that options C and D are not part of the two-stage allocation process. Option C suggests skipping the allocation process entirely, which would not allow for accurate product costing. Option D suggests using a single cost pool, which oversimplifies the process and potentially distorts cost information, leading to less accurate costing.