Question

Traditional-based product costing uses which of the following procedures?

a. All overhead costs are expensed as incurred.
b. Overhead costs are traced directly to products.
c. Overhead costs are traced to activities, then costs are traced to products.
d. Overhead costs are traced to departments, then costs are traced to products.

Answer 1

Traditional-based product costing typically allocates overhead costs to departments before assigning them to products. With a fixed cost of $1,000, the average fixed cost curve will decline as output increases, illustrating the concept of 'spreading the overhead' to achieve a lower cost per unit.

Step-by-step explanation:

Traditional-based product costing typically follows procedure d, where overhead costs are first traced to departments, and then these costs are allocated to products based on some measure of activity. This approach may use a simplistic and broad brush to apply overhead costs, such as labor hours or machine hours, which might not accurately reflect the actual overhead consumed by each product.

Discussing average fixed costs (AFC), they are calculated by dividing the total fixed costs (overhead) by the quantity of output produced. If the fixed cost is $1,000, the AFC curve would slope downwards as output increases, representing the concept of "spreading the overhead". This means that as more units are produced, the fixed cost of $1,000 is spread over more units, resulting in a lower AFC per unit.